Price Surges – What Influences a Surge After a CAT Strikes?

December 30, 2005

In the claims world, we often hear the term “price surge” after a catastrophe. And, most of us can justify those price surges because we know that there is a supply and demand phenomenon, which is commonly used to explain surges.

However, there are some other factors that perhaps you weren’t aware of. Marshall & Swift / Boeckh (MSB) recently sent a group from our Research department to storm-affected areas – from Florida to Texas – to evaluate price surges and what causes them.

Like you, the research group already knew that catastrophic storms create identifiable price surges. They also knew that the ability to measure and report surges accurately requires added levels of data collection, an understanding of environmental factors, and sophisticated delivery mechanisms. By meeting with adjusters, contractors, and material suppliers, MS/B’s researchers would get a better understanding of exactly where the cost pressures occur so we can deliver specific factors related to justifiable price increases.

2004 vs. 2005
Following the Hurricane season of 2004, our research department focused on a subset of repair operations including pricing for roofing, windows, siding, painting, and drywall in various regions, including Fort Lauderdale, Orlando, Tampa, Pensacola, and Panama City, Florida and Mobile, Alabama. The post-hurricane analysis of the 2004 storm season revealed that the price surges for roofing were immediate and continued to move upwards for close to a six month period. About six months into the storm season, the prices began to fall back down to where they were prior to the storms. Conversely, the surge in drywall prices did not occur until months after the storms, and it took roughly four months for the pricing to return to the norm. However, the price of vinyl siding and aluminum siding moved very little over that period of time.

Following the 2005 storm season we saw that as the cost of roofing labor increased, the cost of all related roofing repairs were impacted, including the cost for repair of drip edge, felt, and other components. It is important to note, however, that research showed that the material cost did not spike as aggressively as the labor. This fact was reflected in the data-sets that MSB delivered to customers throughout the storms, allowing estimates to be created using the correct prices and settlement values inclusive of the application of taxes.

What we learned
MS/B’s research techniques measure the impact of price surge on labor and materials in a very detailed, “unbundled” method. This methodology is important because it pinpoints the causes of price surge. Two examples clearly demonstrate the importance.

First, investigation into material pricing reveals that the advent of “big box” retailers has brought a sophisticated warehousing and distribution network to the country that alleviates some of the short term materials shortages. This year, some of these same “big box” retailers have made commitments to hold to pre-storm material pricing, which indicates that there may be little impact on material costs even though the demand is high.

Second, research into labor rates shows that the demand for specific labor often impacts other trades. This year, MSB found that some contractors are forced to pay their trades people a higher wage in order to keep them from re-inventing themselves as roofers or small independent contractors. For example, a general contractor may raise a carpenter’s wage by $5 per hour to prevent him from practicing another trade. Or, a cleaning contractor may be forced to raise his labor rate to prevent his employees from seeking jobs with other firms as “general labor help”, due to the labor rate increases commonly seen after a storm.

With 2006 right around the corner and predictions for a busier storm season than 2005, it is important that we all understand what makes prices surge following catastrophic events. Knowing that there is more to the price surge equation than just supply and demand can help everyone in the “claims world” perform more accurate adjustments and estimates for the policyholders we ultimately serve.

Jonathan Kost is claims vice president for Marshall & Swift / Boeckh.

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