Availability of demand surge analysis

The demand surge modification increases estimated losses according to a function that varies with the amount of modeled insurable industry loss. Insurable industry loss is used rather than insured loss because factors which drive demand surge are not limited to the size of insured industry losses.

Verisk first introduced demand surge in 1992. Since then, we have continuously reviewed and refined it as additional data have become available for analysis.

The current version is triggered at an industry occurrence insurable loss of $5 billion in the 48 contiguous states and $2 billion in Alaska and Hawaii. That is, for losses below $5 (or $2) billion, the function assumes—and evidence suggests—that the available labor and materials resources are sufficient to execute repairs without significant inflationary ramifications. Limited damage also limits business interruption (BI) and additional living expenses (ALE).

Once the threshold of $5 billion is reached, the demand surge function increases rapidly. At this level of loss, it may not be cost effective to import labor to the affected region. With little increase in the supply of labor regionally, the increased demand surge will manifest itself in higher prices.

For larger losses, the function increases at a slower rate as the search for available resources broadens and laborers begin to migrate into the region, attracted by the higher wages. For very large events, demand surge increases at a constant rate and ultimately levels off. During these stages, product substitutions flow in from neighboring regions, restricting increases in materials prices, while the expanded labor pool begins to experience diminishing returns.

Demand surge is also capped by insurance policy limits, which typically allow for a maximum replacement cost of between 25 and 50 percent in excess of insured value.