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Insured loss inflation: How natural catastrophes affect reconstruction costs

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  • Döhrmann, David
  • Gürtler, Marc
  • Hibbeln, Martin

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.

Suggested Citation

  • Döhrmann, David & Gürtler, Marc & Hibbeln, Martin, 2013. "Insured loss inflation: How natural catastrophes affect reconstruction costs," Working Papers IF44V2, Technische Universität Braunschweig, Institute of Finance.
    • Handle: RePEc:zbw:tbsifw:if44v2
    DOI: 10.2139/ssrn.2222041
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    References listed on IDEAS

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    More about this item

    Keywords

    Demand Surge; Natural Catastrophes; Reconstruction; Insured Losses;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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