Insured loss inflation: How natural catastrophes affect reconstruction costs

David Döhrmann, Marc Gürtler and Martin Hibbeln

No IF44V2, Working Papers from Technische Universität Braunschweig, Institute of Finance

Abstract: In the aftermath of a natural catastrophe, there is increased demand for skilled reconstruction labor, which leads to significant increases in reconstruction labor wages and hence insured losses. Such inflation effects are known as 'Demand Surge' effects. It is important for insurance companies to properly account for these effects when calculating insurance premiums and determining economic capital. We propose an approach to quantifying the Demand Surge effect and present an econometric model for the effect that is based on 191 catastrophe events in the United States. Our model explains more than 75% of the variance of the Demand Surge effect and is thus able to identify the key drivers of the phenomenon.

Keywords: Demand Surge; Natural Catastrophes; Reconstruction; Insured Losses (search for similar items in EconPapers)
JEL-codes: G22 J23 J31 Q54 R23 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tbsifw:if44v2

DOI: 10.2139/ssrn.2222041

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