The insurance industry's biggest competitor has arrived—is the prediction market the "barbarian at the gate"?

Original｜Odaily Planet Daily (@OdailyChina)

Author｜Wenser (@wenser2010 )

For a long time, the insurance industry has held a "ballast stone" position in the economic system due to its monopolistic nature. However, with the emergence of prediction markets, this status quo may be about to change.

In early June, the NBA Finals concluded with the New York Knicks defeating the San Antonio Spurs 4-1 to win the championship, leading to mixed emotions among the countless participants in the betting pools. One of the happiest people might be Andy Freedman, the owner of The Jeffrey, a bar in New York's Upper East Side. Before the series began, he launched a marketing campaign promising free drinks for all customers if the Knicks won Game 1, while simultaneously placing a $5,000 risk hedge on the prediction market platform Kalshi. In the end, the Knicks won the first game, The Jeffrey bar covered its drink costs with the prediction market payout, and the bar's customers enjoyed free drinks – a "triple-win" conclusion to the story.

This is just one example of prediction market platforms functioning in risk hedging and property insurance. With the World Cup attracting billions of dollars in participation, the real-world insurance industry now faces "a barbarian at the gate."

Can You Really "Buy Insurance" on Prediction Market Platforms?

Yes, you read that correctly. To some extent, prediction market platforms like Kalshi and Polymarket have begun encroaching on the business territory of insurance companies, encompassing not only conventional marketing but also sports insurance, weather disasters, and more.

When Prediction Markets Poach Sports Insurance Clients: Kalshi Partners with Game Point Capital

In February this year, professional sports insurance broker Game Point Capital announced a partnership with Kalshi, where the latter will provide hedging for NBA team performance bonuses (e.g., playoff advancement bonuses) for the former.

As a specialized company issuing hundreds of millions of dollars in sports insurance annually, Game Point Capital's shift is clearly not just to cater to the development of the prediction market industry, but a comprehensive consideration based on business needs, costs, and other factors.

From a market demand perspective, sports insurance has always existed. Reportedly, because championship bonuses are typically paid by the teams themselves, professional sports teams usually buy insurance in advance to cover this expense. Due to the large amounts involved, teams traditionally relied on support from conventional insurers like Lloyd's, Munich Re, and Swiss Re.

From a cost perspective, prediction market platforms offer more competitive pricing. It is understood that Kalshi's pricing is significantly lower than traditional over-the-counter markets (e.g., 6% for bonus hedging vs. the traditional 12-13%). The platform is expected to handle tens of millions of dollars in hedging funds through this cooperation. This is a direct example of prediction markets entering the traditional insurance and reinsurance sectors. Kalshi CEO Tarek Mansour described this as "a better way to hedge and insure," emphasizing that "the pricing will be more transparent."

When Prediction Markets Become a "Home Price Hedging Tool": Polymarket Joins Forces with Parcl to Start a "New Real Estate Trading Model"

In January this year, on-chain real estate platform Parcl announced a partnership with Polymarket to introduce Parcl's daily home price index into Polymarket's new real estate prediction markets. The initial markets will focus on major US cities like New York, Los Angeles, Miami, and Austin. Users can predict the monthly, quarterly, or annual rise or fall, as well as specific threshold outcomes, of home price indices in designated cities.

Upon the announcement, Parcl's project token PRCL saw a surge of over 100% that day. For Americans unable to buy homes due to high prices, they can now participate in "real estate trading" without actually purchasing property. Realtor senior economist Joel Berner believes that "beyond speculating on home prices, homeowners and potential buyers can also use these markets to protect their market interests."

For sellers worried about falling home prices, they can buy "Under" options on Polymarket. If prices do fall later, the resulting profits can partially offset actual property losses, acting as insurance. For buyers or those planning to purchase homes who fear rising prices, they can predict "Over," and the corresponding gains can help cover home purchase costs.

When NBA Games Are Tied to Free Drinks: A Cross-Industry Marketing Campaign by a NYC Bar and Kalshi

In early June, Kalshi officially announced that the New York bar The Jeffrey had placed a $5,000 prediction on the "Knicks winning Game 1," with the slogan: "If the New York Knicks win, the bar picks up the tab for all customers." Notably, the official statement used the term – "place a $5,000 hedge on Kalshi" – strongly emphasizing the insurance value of the prediction market.

In the same press release, Kalshi revealed a greater ambition: to become an "insurance provider for small businesses." It aims to offer services including sports event predictions, weather condition forecasts, and import-export policy change predictions for hotels and motels with seasonal fluctuations affected by sports events, clothing stores and other commercial venues impacted by weather-driven foot traffic, and small businesses reliant on imported goods, thereby enabling insurance hedging.

Kalshi's Head of Business, Nicolas Hull, believes, "Small businesses face various real-world risks every day – weather, political, sports, and economic issues. Traditional insurance methods are expensive and inefficient for effectively managing these operational risks. Kalshi changes this: we provide a liquid, transparent market platform that allows any business to take corresponding measures against risks affecting their operational results. This marks a fundamental shift in how small businesses manage risk."

These examples demonstrate that the insurance value of prediction markets can be widely applied across multiple fields, not just limited to sports events or brand marketing. And in practical applications, traditional sports betting has already seen success stories.

Old Wine in a New, Better Bottle: The Insurance Value of Prediction Markets Lies in Transparency and Liquidity

In 2018, home appliance brand Vatti launched a high-profile marketing campaign with the gimmick "Full Refund if the French Team Wins the World Cup." Although it ultimately ended in a farce of "tight deadlines, cumbersome processes, and cash equivalents with coupons," it left a lasting impression on many regarding the "freebie marketing" concept.

Coincidentally, this had been done before.

In 2017, Houston furniture magnate Jim McIngvale (AKA "Mattress Mack") pulled off a $12 million "refund marketing" stunt centered on the "Houston Astros winning the championship."

Five years later, in 2022, "Mattress Mack" repeated the trick with a similar promotion. Between May and July of that year, he invested $10 million across six different sportsbooks in Louisiana, Iowa, and Las Vegas, again betting on the "Astros winning the championship," stating explicitly that he would return "every penny" of his winnings to the 3,000 customers who had previously participated in his furniture chain's promotional offer. (Odaily Planet Daily Note: This offer was for customers purchasing furniture over $3,000, who could receive a full or even double refund depending on the participation time.)

Ultimately, the then-71-year-old "Mattress Mack" won big again, claiming a $72.6 million prize, setting a record for the largest sports betting payout at the time.

However, compared to sports betting, the "insurance" functionality of prediction markets has seen significant upgrades.

First is the monetization of information. This brings two key benefits: (1) Broader market scope. Unlike traditional betting with its limited options and narrow fields, prediction markets offer a much wider "range of selectable events." (2) More flexible exit strategies. Unlike betting activities where the maximum outcome is a cash refund, prediction market events react more directly to the potential impact of information changes, facilitating immediate decision-making for participants.

Second is the platform's neutral role. Unlike the "platforms," "bookmakers," and "whales" in sports betting events, prediction market platforms exist as neutral entities. They merely provide a trading channel and do not act as counterparties to their users.

Third is transaction information transparency. Odds in sports betting are typically determined by backend companies based on their own algorithms and internal information. Many firms even use a "copy-trading" model, directly copying odds changes from other major platforms. Odds movements and order transaction information are extremely opaque, and the criteria for event resolution are often ambiguous or subject to insider trading (similar to sweeping up leftover orders).

Fourth is participant准入制度. In the US, most sports betting operators operate on a "ban or bankrupt" model. This is a business model that "restricts trading by high-win-rate customers while inducing losers and casual players to trade." In 2024, legendary gamblers Billy Walters and "Spanky" Kyrollos, along with former casino executive Richard Schuetz, co-founded a non-profit advocacy organization called American Bettors Voice (ABV). Its core proposition is opposition to the "ban or bankrupt" model, demanding reasonable regulation of betting limits to ensure market fairness.

Compared to traditional sports betting, the insurance value of prediction markets is undoubtedly more attractive and provides better guarantees. SIG CEO Jeff Yass, a prominent market maker, previously mentioned in a Forbes interview: "Prediction markets allow parties to share risk more efficiently based on specific parameters. For example, when Florida homeowners face hurricane risk, they can choose to purchase 'parametric' contracts. Based on the latest meteorological data, if wind speeds exceed a specified threshold, the homeowner receives insurance protection. This is a more effective way to manage potential property loss risk compared to buying annual insurance."

Of course, at present, the insurance value of prediction markets is not yet fully developed and widely adopted, still facing the following issues:

• Insufficient liquidity. A wide selection range does not guarantee sufficient market trading depth.
• Ambiguous regulatory boundaries. Whether platforms like Kalshi and Polymarket can sustainably perform insurance functions still awaits regulatory approval.
• Decentralized governance risks. The incident where someone used a hairdryer to influence observation equipment for profit in a Polymarket weather prediction event serves as an example. Sometimes the criteria for event resolution can be affected by unpredictable external forces, or the platform's rulesets may contain various loopholes.

Nevertheless, the first step has been taken. Whether the insurance industry acknowledges it or not, prediction market platforms threaten not only sports betting platforms but also many traditional insurance companies.

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