According to the 360Value® Quarterly Cost Update, reconstruction costs have increased by at least 3 percent in all northeastern states for first-quarter 2013. That’s primarily attributable to the demand surge caused by Hurricane Sandy and could affect replacement cost estimates for the foreseeable future.
Demand surge is a simple result of changes in supply and demand. When catastrophes occur, demand for labor and materials increases, decreasing the supply and resulting in higher reconstruction costs. While the concept is simple, the results of demand surge are challenging to measure. For each event, geography, duration, and changes in reconstruction costs will differ.
Therefore, there is no standard demand surge formula to capture the expected effect of an event. Insurers must closely monitor the influence of each catastrophe on each geographic area and report changes in costs as they occur.
One trait common to most cases of demand surge is a lag time of several weeks between the catastrophe and the surge — and an even longer time before the surge levels off. A common misperception about demand surge is that it’s a short-term phenomenon. In fact, as observed after Hurricanes Katrina and Ike and the 2004 Florida hurricanes, it can take years before reconstruction costs return to normal.
Insurers must consider demand surge when assessing replacement cost estimates for new or renewing policies after a catastrophe. While elevated replacement cost estimates may be only a temporary phenomenon, for significant events, demand surge can affect costs for several years. The building cost research process that Xactware uses naturally captures the effect of demand surge, so you can be confident that 360Value replacement cost estimates reflect the potential effect of the event.