IDEAS home Printed from https://ideas.repec.org/p/zbw/tbsifw/if44v2.html
   My bibliography  Save this paper

Insured loss inflation: How natural catastrophes affect reconstruction costs

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/97788/1/788247247.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.2139/ssrn.2222041?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Stéphane Hallegatte & Valentin Przyluski, 2010. "The Economics of Natural Disasters," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(02), pages 14-24, July.
    2. William R. Smith, 2005. "Florida housing: blueprint for success?," EconSouth, Federal Reserve Bank of Atlanta, vol. 7(Q3).
    3. Anne Gron, 1994. "Capacity Constraints and Cycles in Property-Casualty Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 110-127, Spring.
    4. David C. Marlett & Richard Corbett & Carl Pacini, 2000. "Insurer Stock Price Responses to the Disclosure of Revised Insured Loss Estimates After the 1994 Northridge Earthquake," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 23(2), pages 103-123.
    5. Stéphane Hallegatte, 2008. "An adaptive regional input-output model and its application to the assessment of the economic cost of Katrina," Post-Print hal-00716550, HAL.
    6. Roger A. Pielke, 2005. "Are there trends in hurricane destruction?," Nature, Nature, vol. 438(7071), pages 11-11, December.
    7. Ariel R. Belasen & Solomon W. Polachek, 2008. "How Hurricanes Affect Wages and Employment in Local Labor Markets," American Economic Review, American Economic Association, vol. 98(2), pages 49-53, May.
    8. Belasen, Ariel R. & Polachek, Solomon, 2008. "How Hurricanes Affect Employment and Wages in Local Labor Markets," IZA Discussion Papers 3407, Institute of Labor Economics (IZA).
    9. Kunreuther, Howard C. & Michel-Kerjan, Erwann O., 2011. "At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262516543, December.
    10. Partha Gangopadhyay & Joseph D. Haley & Li Zhang, 2010. "An Examination of Share Price Behavior Surrounding the 2005 Hurricanes Katrina and Rita," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 33(2), pages 132-151.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Döhrmann & Marc Gürtler & Martin Hibbeln, 2017. "Insured Loss Inflation: How Natural Catastrophes Affect Reconstruction Costs," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(3), pages 851-879, September.
    2. Lorilee A. Medders & Charles M. Nyce & J. Bradley Karl, 2014. "Market Implications of Public Policy Interventions: The Case of Florida's Property Insurance Market," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 17(2), pages 183-214, September.
    3. Fujin Zhou & Wouter Botzen, 2021. "Firm Level Evidence of Disaster Impacts on Growth in Vietnam," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 79(2), pages 277-322, June.
    4. Mendelsohn, Robert & Emanuel, Kerry & Chonabayashi, Shun, 2011. "The impact of climate change on hurricane damages in the United States," Policy Research Working Paper Series 5561, The World Bank.
    5. Masato Yamazaki & Atsushi Koike & Yoshinori Sone, 2018. "A Heuristic Approach to the Estimation of Key Parameters for a Monthly, Recursive, Dynamic CGE Model," Economics of Disasters and Climate Change, Springer, vol. 2(3), pages 283-301, October.
    6. Matteo Coronese & Davide Luzzati, 2022. "Economic impacts of natural hazards and complexity science: a critical review," LEM Papers Series 2022/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    7. Stéphane Hallegatte, 2014. "Modeling the Role of Inventories and Heterogeneity in the Assessment of the Economic Costs of Natural Disasters," Risk Analysis, John Wiley & Sons, vol. 34(1), pages 152-167, January.
    8. Jahn, Malte, 2013. "Economics of extreme weather events in cities: Terminology and regional impact models," HWWI Research Papers 143, Hamburg Institute of International Economics (HWWI).
    9. Felbermayr, Gabriel & Gröschl, Jasmin & Sanders, Mark & Schippers, Vincent & Steinwachs, Thomas, 2018. "Shedding Light on the Spatial Diffusion of Disasters," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181556, Verein für Socialpolitik / German Economic Association.
    10. Jorge Garcia Hombrados, 2018. "Empirical essays on development economics," Economics PhD Theses 0318, Department of Economics, University of Sussex Business School.
    11. Desbureaux, Sébastien & Rodella, Aude-Sophie, 2019. "Drought in the city: The economic impact of water scarcity in Latin American metropolitan areas," World Development, Elsevier, vol. 114(C), pages 13-27.
    12. Benjamin A. Jones & Shana McDermott, 2021. "The Local Labor Market Impacts of US Megafires," Sustainability, MDPI, vol. 13(16), pages 1-15, August.
    13. Martina Kirchberger, 2014. "Natural Disasters and Labour Markets," Economics Series Working Papers WPS/2014-19, University of Oxford, Department of Economics.
    14. Donadelli, M. & Jüppner, M. & Paradiso, A. & Ghisletti, M., 2020. "Tornado activity, house prices, and stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    15. Carvalho, Carlos & Masini, Ricardo & Medeiros, Marcelo C., 2018. "ArCo: An artificial counterfactual approach for high-dimensional panel time-series data," Journal of Econometrics, Elsevier, vol. 207(2), pages 352-380.
    16. Philippe Kabore & Nicholas Rivers & Catherine Deri Armstrong, 2023. "Natural disasters and economic performance: Evidence from the Slave Lake wildfire," Working Papers 2301E Classification-D14,, University of Ottawa, Department of Economics.
    17. Vijay Aseervatham & Patricia Born & Dominik Lohmaier & Andreas Richter, 2017. "Hazard-Specific Supply Reactions in the Aftermath of Natural Disasters," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(2), pages 193-225, April.
    18. Julio G. Fournier Gabela & Luis Sarmiento, 2020. "Kurzarbeit and Natural Disasters: How Effective Are Short-Time Working Allowances in Avoiding Unemployment?," Discussion Papers of DIW Berlin 1909, DIW Berlin, German Institute for Economic Research.
    19. Geoffrey R. Dunbar & Walter Steingress & Ben Tomlin, 2023. "Climate Variability and International Trade," Staff Working Papers 23-8, Bank of Canada.
    20. Pelli, Martino & Tschopp, Jeanne, 2017. "Comparative advantage, capital destruction, and hurricanes," Journal of International Economics, Elsevier, vol. 108(C), pages 315-337.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:tbsifw:if44v2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/iwtbsde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.