An econometric analysis of the demand surge effect

Devastating natural catastrophes lead to severe damages to buildings and infrastructure which have to be eliminated in the aftermath of the event. Thus, the demand for skilled labor and materials increase sharply which in turn leads to significant price increases that should be taken into account in the forecast of catastrophe losses. This interdependency is referred to as the “Demand Surge” effect. The paper at hand presents an extensive econometric analysis and modeling of the Demand Surge effect based on data about 176 natural catastrophes in the US provided by EM-DAT. We find that Demand Surge is positively influenced by the total amount of repair work, by alternative catastrophes in the same region in close temporal proximity, and by a higher amount of insurance claims per event. Furthermore, the Demand Surge effect is more pronounced if the construction sector is in a growth stage. The contribution is a short summary of a working paper presented at the annual meeting of the German Insurance Science Association (DVfVW) in Berlin in March 2013.