Monday, November 9th, 2026 — Prediction markets that allow businesses and individuals to bet on hurricanes, snowstorms and other weather events are raising questions about whether these financial contracts should be treated as insurance and how effectively they can protect against actual losses.
Unlike traditional insurance policies, which generally respond to covered damages, weather-based event contracts pay when predetermined conditions occur. A business could receive money when a hurricane reaches a particular location even if its property escapes damage. Conversely, the business could suffer substantial losses without receiving a payout if the contract's specific conditions are not met.
Daniel Schwarcz, a professor at the University of Minnesota Law School and former consumer representative to the National Association of Insurance Commissioners, identifies this mismatch as basis risk, one of the biggest obstacles to using prediction markets as substitutes for insurance.
The distinction also carries regulatory consequences. Under a 2012 rule established by the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission, an insurance safe harbor considers whether a contract protects an identifiable insurable interest, responds to a demonstrated loss and limits payments to the value of that interest. Additional conditions also apply.
Contracts classified as swaps generally fall under federal commodities oversight, while insurance products remain subject to state insurance regulation.
Prediction-market operator Kalshi is already involved in federal litigation over the classification of its event contracts. In September, the Sixth Circuit Court of Appeals ruled against the company in disputes involving sports-event contracts and gambling regulators in Ohio and Tennessee. Other federal appeals courts have reached conflicting conclusions, creating uncertainty over the boundaries of state and federal authority.
Those cases concern sports wagering rather than insurance, but they demonstrate the broader legal questions surrounding event-based financial products.
For commercial property owners, the practical challenges may be equally significant. Schwarcz suggests that larger businesses with geographically diversified operations could manage basis risk more effectively than smaller companies dependent on a single location.
A narrowly defined hurricane contract might offer a useful financial hedge, but it cannot guarantee that payments will correspond to an individual property's damage or lost revenue.
Schwarcz sees greater potential in carefully designed parametric insurance products, which use objective triggers to determine payments. Such arrangements could offer faster settlements while maintaining a closer connection to insured losses.
For insurers, brokers and claims professionals evaluating these products, the relationship between a contract's trigger and the customer's actual exposure remains a central consideration.
