When Teams Hedge Risks with Prediction Markets, a Trillion-Dollar Financial Market Emerges

Prediction markets are no longer just a place for sports fans to trade: now, teams themselves are starting to use them.

Here's a simple example: A basketball club promises its head coach a $20 million bonus if the team makes the playoffs. This is a straightforward incentive; if the team wins enough games and qualifies for the playoffs, the bonus is paid.

From a financial perspective, however, this promise represents a significant liability. Once the team makes the playoffs, the $20 million must be paid out, regardless of the team's annual revenue or financial health.

To manage this risk, teams typically purchase insurance. Brokers design policies and find insurance companies willing to underwrite them; these insurers may then transfer part of the risk to reinsurers to avoid bearing the full exposure alone. The final price of this protection is negotiated privately between institutions. The premium implicitly contains a judgment of the team's probability of advancing, but this number is never made public—it exists only in the quotes given to the team.

Now, there's another solution for the same risk.

The team's probability of advancing is already being priced elsewhere. In prediction markets, this probability is traded daily, visible to everyone, and fluctuates in real-time with changing expectations.

A team no longer has to rely solely on private insurance quotes; it can reference the public market probability to hedge part of its bonus risk.

How Sports Insurance Works

To understand how this system operates, let's look at what has changed in the sports industry over the past 20 years.

Today, professional sports generate nearly $560 billion in annual revenue, growing at about 7% per year. Revenue primarily comes from media rights, sponsorships, licensing, streaming platforms, and global commercial partnerships.

As revenue streams have expanded, the contracts tied to them have also grown in value.

Team compensation today is no longer just base season salaries; it includes numerous performance clauses linked to specific milestones. For example, a head coach might receive an additional $5 million bonus if the team reaches the conference finals; players can earn extra pay for achieving 1,000 rushing yards, 25 goals, or meeting minimum appearance requirements; some contracts even stipulate that bonuses increase further if the team advances deeper into the playoffs. These clauses are written into contracts to trigger automatically; once conditions are met, the corresponding payment must be made.

Teams manage this type of exposure through insurance rather than passively accepting the risk and hoping incentives don't all trigger at once. They work with specialized brokers, who then find insurance companies willing to underwrite performance payouts; these insurers often transfer part of the exposure to reinsurers, spreading the risk across a larger capital pool. A simple bonus clause in a contract becomes an entire financial chain behind the scenes.

Insurers measure the scale of exposure using a concept called "insurable value." Simply put, this refers to future income dependent on sustained performance—including salaries, incentives, endorsement revenue, etc.—all of which can be affected if a player is unable to compete.

The explosive growth of this type of exposure is evident in the data. For instance, during the 2014 FIFA World Cup, the total insurable value for all participating teams was estimated at around $7.3 billion. By the 2022 World Cup, this figure had surged to approximately $25 billion. In less than a decade, the financial value directly tied to on-field performance more than tripled.

When so much revenue is tied to performance, uncertainty cannot be left to chance—it must be managed. An entire industry has been born as a result. The global sports insurance and reinsurance market is currently estimated at around $9 billion and is expected to double by 2030. Its coverage spans everything from event cancellation and athlete disability to sponsor guarantees and performance bonuses.

The market includes specialized brokers like Game Point Capital, handling hundreds of millions of dollars in sports insurance annually; on the other side are underwriters like Lloyd's, writing over $200 million in sports-related accident and health premiums each year, and large reinsurers who also cover catastrophes like hurricanes and aviation accidents. Because, in pricing logic, playoff bonuses fall into the same category of risk as storms and earthquakes.

Consequently, the pricing process is cautious and private. Brokers negotiate with insurers, insurers negotiate with reinsurers, each using their own models to estimate the probability of milestone achievement and factoring it into the premium. The team only sees the cost, not the underlying probability.

Why Private Reinsurance is More Expensive

The price of sports insurance depends not only on the probability of a team achieving its goal but also on numerous external risks.

Ideally, if a team has a 10% chance of reaching a milestone, the premium would roughly reflect a 10% risk plus a small profit margin. But the reinsurance market is not an ideal world.

Reinsurers have limited capital. Every dollar allocated to playoff bonus insurance is one less dollar available for hurricanes, aviation, catastrophe bonds, and other lines of business. They must continuously balance their portfolios across different regions and risk types. Therefore, when assessing sports risk, they consider: probability, capital requirements, outcome volatility, and correlation with existing risks.

Another constraint: the sports reinsurance market is highly concentrated. A handful of global institutions hold most of the underwriting capacity. Access to capacity and its amount often depend on the reinsurer's own portfolio situation.

All these factors combine, meaning the premium ultimately offered to the team doesn't just contain the pure milestone probability but also includes many costs invisible to the team.

When Probability is No Longer Hidden in a Black Box

Until now, outcome probability has been integral to every step: reinsurance modeling, broker negotiations, premium finalization. But this number has never been public.

Now imagine: what happens when this probability is priced in a public market? Prediction markets achieve this in a very interesting way.

Platforms like Kalshi have launched contracts for discrete real-world events, including sports outcomes. A contract poses a simple question: Will Team X make the playoffs?

Each contract ultimately settles at $1 or $0. For example, a price trading at $0.06 implies a market-implied probability of 6%.

This number isn't decided by an underwriting committee; it's determined by real buyers and sellers trading with real money, continuously adjusting based on their judgments of probability and price.

This mechanism is already in practical use. Game Point Capital uses Kalshi markets to hedge basketball-related performance bonuses. In one case, a contract related to making the playoffs traded on the exchange at around 6%, while over-the-counter quotes implied a price of about 12-13%. In another case, a contract for advancing to the second round traded near 2% on the exchange, while the private reinsurance market price was 7-8%.

This is not a trivial difference. For a $20 million exposure, the gap between a 6% and a 12% implied probability translates to millions of dollars in premium cost.

You might ask: these are just numbers clicked by traders; why take them seriously? Why are they more credible than an insurance company's model?

Extensive research shows that market-based odds are strong predictors of real-world outcomes. Decades of academic research on sports betting markets show that bookmaker odds are highly efficient predictors of game outcomes. More recently, a direct comparison between prediction markets and traditional sports betting: in a study of about 1,000 NBA games during the 2024–25 season, Polymarket's prediction accuracy was nearly identical to that of traditional betting platforms.

In games where the market-implied probability exceeded 95%, both achieved accuracy rates above 90%.

The conclusion is even clearer for election markets. During the 2024 U.S. presidential election, a study comparing Polymarket to traditional polls showed that Polymarket was more accurate in predicting the final outcome, especially in swing states.

When thousands of people continuously update their expectations in a real-time market, the collective probability often aligns remarkably closely with reality.

Prediction markets enable continuous price discovery. Any new information entering the system is continuously updated and priced, without waiting for the next review by an underwriting committee.

But to be truly useful, the market must be able to handle scale. In recent major events like the Super Bowl, Kalshi processed around $22 million in trading volume without significant price slippage. This indicates that the market has genuine depth on both the buy and sell sides, sufficient to support large-scale hedging without impacting prices.

As these markets grow, a whole new suite of permissionless financial tools is emerging around prediction markets.

For example, Kalshinomics analyzes event contracts like analysts analyze stocks and bonds, tracking how probabilities change over time, liquidity behavior around major events, and whether prices deviate from fundamentals.

There are also platforms like PredictionIndex, which aggregate and rank various prediction markets. You can see total trading volume, contract types, blockchains, trading mechanisms—consolidating the entire field into one place to visually demonstrate market scale.

When the probability of an outcome can be priced in real-time and can effectively absorb capital, it becomes a tool institutions can actually use. Teams can now directly hedge performance bonuses using publicly traded probabilities, sponsors can hedge exposure related to viewership targets, studios can hedge box office milestones. In principle, any revenue dependent on a clear and verifiable outcome can be transformed into a tradable contract.

Institutions no longer have to negotiate customized insurance contracts; the outcome itself can be publicly traded.

The final piece making this structure truly usable for institutions is identity. Traditional insurance works because counterparties are verified, contracts are enforceable, and exposure is auditable—a layer that has been missing from public markets.

Companies like Dflow are linking real-world identity to trading activity. This means market participants can be identified, screened, and linked to real-world entities, rather than being completely anonymous. It also makes contract settlement, exposure management, and incorporating positions into existing compliance frameworks possible.

In practical effect, it's starting to look less like an ordinary trading venue and more like a functional insurance layer operating directly on top of public probabilities.