2004 hurricane season leaves continued costs scars

Risk Management Solutions (RMS) has announced that elevated labour and material costs following last year's hurricanes are likely to continue throughout the 2005 season, which has now started.

RMS has been tracking demand surge through its analysis of insurance claims data from the 2004 storms. As of May 2005, costs remained 20%-40% above average, with a considerable amount of repairs still under way in Florida. In this environment, even a modest event could trigger further demand surge, escalating insured and economic losses, particularly in the southeastern US.

Demand surge occurs when building materials and contractors are in short supply after a major catastrophe(s). The 2004 hurricane season witnessed a high level of demand surge when Florida and other southeastern states experienced four hurricanes within 37 days. The storms resulted in over two million claims, nearly three times the volume from Hurricane Andrew in 1992. Many of the Florida homes damaged in 2004 were of comparable construction, and in need of similar repairs (such as roofing), leading to a surge in demand for materials and labour.

The situation has been further aggravated by pre-existing high prices for plywood, due to reconstruction work in Iraq, and a reduced supply of steel and cement resulting from a worldwide construction boom. Restrictions placed on out-of-state contractors further limited the supply of labour in Florida, thus contributing to the increases.

"Although construction material costs are up 5%-10% nationwide, the increase in labour costs has outpaced this by a significant margin in Florida and Alabama," said Phil LeGrone, claims research director for RMS. "Due to the sustained escalation of labour costs in these states, if a hurricane makes landfall in the southeastern US this year, its economic impact will be as if it were the fifth event in the 2004 season."