Factors affecting the demand surge function

A significant hurricane, earthquake, or other catastrophe event can cause widespread damage to property, which can in turn lead to a sharp increase in the need for building materials and labor. Demand also increases sharply for related services and resources such as transportation, equipment, and storage in the affected area.

While resource availability in any regional economy is usually sufficient to accommodate normal demand, an unexpected and sudden increase in demand can lead to shortages and, ultimately, to price increases. This inflationary effect will serve to increase coverage A and B losses to insurers. In addition, low regional capacity to meet the increased demand can result in longer-than-normal repair times. This, in turn, results in greater business interruption losses and additional living expenses (Coverage D). Infrastructure damage, delayed building permit processes and a shortage of available building inspectors are also factors in increasing a time element loss.

Should a second event occur in close geographical and temporal proximity to the first—before rebuilding from the first event has been completed—the demand for materials and labor will have a bigger impact on the regional economy than the occurrence of a single event. Thus, for purposes of modeling demand surge, it is necessary to consider the aggregation of damage and loss from events both preceding and succeeding a particular event. In 2004, for example, Florida experienced four hurricanes—three of them major—within a span of 45 days. Each hurricane generated losses of around $6 billion (in 2004 dollars), but the region suffered a total loss exceeding $20 billion. The pressure on resources was much larger than had the same four events occurred over a longer time period and greater geographical distance.

Verisk’s demand surge function reflects economic inflation only. It does not account for other factors that may increase insured losses in the aftermath of a catastrophe, such as hazardous waste clean-up or insurance-to-value issues. These factors may cause higher losses than expected, but do not constitute demand surge. In addition, it is not correct to use a single factor to adjust for insurance-to-value or hazardous waste clean-up because the correct adjustment for these issues is heavily dependent on the type of business a company writes.

If further adjustments to loss estimates are required due to such issues, you can manually modify the demand surge function, as well as the application of other loss adjustment factors. To resolve insurance-to-value issues, you can use Verisk 360Value™ to obtain more accurate replacement values for insured residential and commercial properties.