Insured Loss Inflation: How Natural Catastrophes Affect Reconstruction Costs

Insured Loss Inflation: How Natural Catastrophes Affect Reconstruction Costs

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Article ID: iaor20173423
Volume: 84
Issue: 3
Start Page Number: 851
End Page Number: 879
Publication Date: Sep 2017
Journal: Journal of Risk and Insurance
Authors: , ,
Keywords: risk, financial, investment, construction & architecture, demand, statistics: regression
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 192 catastrophe events in the United States. Our model explains more than 75 percent of the variance of the Demand Surge effect and is thus able to identify the key drivers of the phenomenon.

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