Demand surge enhancements for U.S. perils

The enhanced U.S. demand surge model estimates post-catastrophe increases in reconstruction costs for select U.S. perils by modeling construction labor disruption and cost inflation at peril- and state-level resolutions.

This enhancement for select U.S. models represents the next generation of demand surge modeling for the United States and is designed to assess the loss potential of demand surge by modeling the underlying economic mechanisms that drive reconstruction costs to increase after a natural catastrophe. The enhancement models demand surge at peril- and state-level resolutions and is currently available in Verisk Synergy Studio for the U.S. tropical cyclone, inland flood, and winter storm models.

Demand surge is the temporary increase in reconstruction costs following a catastrophe due to sudden imbalance between demand for repairs and supply of construction resources. There is evidence of demand surge following large natural catastrophes in the United States and that the impact of demand surge will vary by peril and the size and location of each event. The industry view of demand surge in the United States has been largely shaped by the 2004 hurricane season (Charley, Frances, Ivan, and Jeanne), Hurricane Katrina in 2005, and the 2017 hurricane season (Harvey and Irma).

The enhanced Verisk demand surge framework models the two primary drivers of demand surge: the disruption to the construction labor market and construction cost inflation over the claim settlement time. This document summarizes the economic foundations of the enhanced Verisk demand surge framework, presents historical context of demand surge, and reports the impact of the average annual losses (AAL) and exceedance probability (EP) metrics across the U.S. tropical cyclone, inland flood, and winter storm

Of these three modeled U.S. perils, tropical cyclone is the most sensitive peril to demand surge. Due to the generally smaller loss levels, the modeled impact of demand surge is smaller for frequency perils, such as inland floods and winter storms. With this enhancement, demand surge effects increase with return period and are most visible in larger-loss years. The new framework captures peril and state-to-state variations, reflecting the localized nature of demand surge on the impact on construction labor and material prices.