Interactive Brokers tests location-specific hurricane contracts on ForecastEx

Interactive Brokers has run its first full live test of location-specific hurricane contracts on its ForecastEx prediction market, listing wind gust contracts for 25 coastal locations as Hurricane Isaias approached the US Gulf Coast, Bloomberg reported.

The contracts pay out based on the peak three-second wind gust recorded at a specific site during a named storm, rather than on basin-wide storm counts or landfalls. Interactive Brokers says the design is aimed at helping insurers, reinsurers and property owners hedge storm risk at the locations they are exposed to.

Isaias pilot settled on modeled gusts

ForecastEx listed contracts for 25 locations on October 7, including 19 in Florida plus Mobile, Gulfport, New Orleans, Brunswick, Savannah and Río Lagartos in Mexico, according to Patrick Brown, head of climate analytics at Interactive Brokers. 

Isaias made landfall on the Florida Panhandle on October 9 as a Category 2 hurricane with 105 mph sustained winds.

All contracts settled shortly after landfall. Catastrophe modeling firm Reask, which acts as settlement agent, calculated a peak gust of 144 mph at Fort Walton Beach, 37% above the storm’s sustained landfall winds. Trading volume was modest and in small retail sizes, concentrated at six locations around landfall.

How the contracts work

Contracts for a location are listed once the forecast probability of gusts of 70 mph or more exceeds about 5%, with thresholds running from 70 mph to 200 mph in 10 mph steps, Artemis reported. The program covers 163 fixed coastal locations across the US Gulf and Atlantic coasts, the Caribbean, Mexico, Central America and northern South America.

Reask reconstructs gusts using the storm’s observed track and a physical model rather than relying on anemometers, which Brown noted can fail during storms. Two weather stations near the Isaias landfall stopped reporting for hours during the event.

Testing demand for storm risk markets

Brown said the contract design drew on feedback from reinsurers and called the pilot “a first step in educating market participants,” according to Bloomberg. Most existing hurricane contracts on platforms such as Kalshi and Polymarket focus on seasonal storm totals and landfalls, while CME dropped its hurricane futures and options in 2014 because of thin trading.

Verisk estimates insured losses from Isaias could reach $2 billion.