Stimulus Should Produce Some Benefits for P/C Insurance

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Insurers, Brokers Anticipate Insuring Construction Projects Funded With $140 Billion Infrastructure Monies

The property/casualty insurance industry should see some modest benefit from the $787 billion federal stimulus package — the American Recovery and Reinvestment Act of 2009 – which is supposed to help jolt the economy back on track.

Fortunately for the P/C industry, it has not gone way off track the way some other industries have, so it doesn’t need a major jolt.

About $650 billion or so of the stimulus package is divided between tax cuts and aid to state and local governments (including college aid, unemployment benefits and Medicaid), neither of which is expected to have much direct impact on insurance. Auto and home insurers could benefit eventually if people begin to buy cars again, the real estate market is revived or there is other economic growth.

The Insurance Information Institute (III) has estimated that each 100,000 decline in housing starts costs home insurers $87.5 million in premium. From 2005 to 2009, the net loss has been about $1.2 billion. Auto sales have less effect on auto insurance.

But the most direct benefit to the P/C industry from the government stimulus is not likely to come from any economic activity spurred by the tax cut or government aid funding. Instead, where the p/c insurance industry will get its biggest direct boost is from the construction projects and jobs that the stimulus promises to create. According to the III, about $135 billion to $140 billion of the total $787 billion will go toward construction spending that could have a direct impact on insurance. This is the stimulus that is most likely to have some ancillary benefits for insurers, agents and brokers, too.

Of the $140 billion for construction, almost one-third is for the transportation segment . Other segments getting construction funds include building infrastructure (29%), energy and technology (20%), water and environmental infrastructure (21%) and schools (9%), according to the III analysis.

The question for the P/C industry is how much of a boost the investment in construction will have for insurance.

According to III economist Robert Hartwig, overall, the stimulus package will result in about a 1 percent increase in premiums written – roughly $4.5 billion by the end of 2010. Since the rollout of the stimulus could take over year, those benefits might not materialize until 2010 or beyond.

The insurance line most likely to benefit is workers’ compensation, largely driven by employment. Assuming the stimulus is true to its target of creating or preserving 3.5 million jobs, private workers compensation insurers could take as much as $1.1 billion in new premium.

Other insurance lines that could see some benefit from the spending would be commercial auto, inland marine, commercial property and liability and surety.

Stimulus dollars are generally allocated by population thus the bigger the state, the more stimulus dollars. The five most populous states are receiving the most money – California, Texas, New York, Florida and Illinois. Those states are projected to add or retain over 1.2 million jobs because of the spending.

While insurance economists like Hartwig may be cautious in projecting benefits, some insurers and agents are anticipating that their business will be getting a boost from the stimulus spending.

“We are hoping the stimulus will help all the various parts of the insurance market to have an opportunity,” said Jeffrey Langer, the Hartford-based chief construction underwriting officer for Travelers.

The world’s largest construction insurance broker, Chicago-based Aon, actually has an infrastructure task force dedicated to assisting public entities with their risk management on stimulus-supported projects. Ken Caldwell chairs that task force as executive vice president of Aon’s construction services practices. Caldwell says that while a bigger stimulus for construction would have been welcome, the $140 billion or so being made available will be put to use.

“We do think the stimulus package, the infrastructure piece, will help tremendously,” said Caldwell, noting that the commercial project sector has “slowed down to a crawl” and the government sector is “hurting because tax revenues are down.”

He sees the funds going toward transportation repair work as well as new construction in some sectors. “I think there will be a variety of projects,” he said. “There’s a lot of repair and maintenance that needs to be done in the United States but there’ll also be some new construction of transportation corridors and in energy, healthcare and things of that sort.”

The construction stimulus should boost workers compensation in particular.

“Our anticipation is for the larger projects there will be more use of owner-controlled and contractor-controlled insurance programs which will help the money go further than it otherwise would and in that area works compensation is 70 to 80 percent of the cost of those programs,” the Aon executive said.

Caldwell said the other big construction insurance pieces are liability and excess liability.

John Carmody, executive director of The Advantage Group LLC, in Washington, said his group also hopes for boost, but it may take longer to be felt than people expect.

“Will it have an effect on insurance agencies? We sure hope so,” he said. “My personal view of that is we’re going to have more pain in front of us before the stimulus package begins to kick in. Then, where you are and what state you’re in will make a big difference… it will have some impact, but a lot of the heaviest spending is on contracting and things like the electronic grid and highways, environmental and stuff like that will probably have a more beneficial impact to brokers than Main Street agents that write small contractors.”

Some agents figure they will benefit because more of their clients will be in better financial condition and able to pay premiums. “The biggest impact will be how it will affect clients,” said Mike Heffernan, president and CEO of the California-based Heffernan Group. “A lot of clients could potentially get help – nonprofit clients, small businesses, from a credit standpoint, that can use the funding to keep going. Our whole livelihood is focused on our clients’ success. Anything that will help the people we serve will help the entire industry.”

William Duckworth, senior vice president for Oklahoma City-based C.L. Frates and Co., and Frank Smith, head of the agency’s construction division, are already seeing an impact in their state and among their clients. According to Duckworth, in March alone there will be three different requests for bids on state and city construction contracts in Oklahoma, which is unprecedented. “That’s three, for substantial dollar volumes,” Duckworth said. “We figure that is due to some of the funding that’s going to be released this month [as part of] the stimulus package.”

“Our book of business is 90 percent or more Oklahoma contractors and they’re going to have a lot of work,” said Smith. “That’s going to take a lot of new employees. They’re going to have to buy new or additional equipment, motor graders, dozers, all that kind of stuff, as well as vehicles, truck tractors, trailers, other types of vehicles.”

People in the construction field are grateful for the stimulus package. Construction employment declined in 47 states in 2008.

The Associated General Contractors of America has concluded that the stimulus legislation will create or save nearly 2 million jobs over the next two years. The group’s analysis, conducted by economist Ken Simonson, found that the infrastructure and construction funding would create or save 650,000 construction jobs and 300,000 positions in related fields such as equipment and material supply. An additional 970,000 jobs in the broader economy would also be created or supported.

“There’s no doubt the stimulus will have a positive impact for construction businesses and their workers across the country,” said Stephen Sandherr, CEO of the contractors association. “When you get beyond the politics and the policy, the fact remains these investments will put people to work, save businesses, and help rebuild aging infrastructure.”

The Downside

In the rush to get new projects started, Travelers’ Langer cautioned that the stimulus package could create some additional risks for insurers – particularly in the area of safety.

“One thing that insurers need to consider is that there are many contractors out there looking for work, and some will be bidding on work they may not be qualified to do,” said Travelers’ Langer.

Also, despite construction unemployment in the mid-teens across much of the country, there could also be a hiring problem. “As contractors begin to ramp up and bid, there’s a question whether they will be able to find the labor to accomplish the goal costs as low as they bid. From a contractual standpoint, it could be a problem,” Langer said.

John Komidar, second vice president of Travelers Construction Risk Control, seconded Langer’s warning:

“Contractors need to continue to maintain a strong emphasis on safety management, including safety practices and training, to help limit losses and the impact these could have on their bottom line,” Komidar said.

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