Southeast Agents Fear Recession as Construction Woes Continue

Shrinking payrolls and receipts exacerbate soft market effects of lower premiums and commissions

Southeast insurance agents do not all agree the economy is in a recession or on the causes of the slumping economy, but they do agree the dominoes are in place that could trigger a serious economic chain reaction.

Roger Gibson, of GHG Insurance in Jacksonville, Fla., ties the downslide of the economy directly to the woes of the construction industry.

“I firmly believe we are in a recession,” Gibson said. “People fail to realize how much the construction industry impacts the economy of the country.”

Gibson said in his area, high housing inventories are accentuated by the absence of new or ongoing developments. There’s just not as much work out there. In the midst of premium audit season, he said his company is giving back money – mainly with general liability policies. “Lower exposure impacts premium,” he said.

Gibson predicts that it will take up to four years for the housing inventory to dry up and for the current slump to cycle out.

The pressure for lower premiums from the soft market is compounded by new carriers entering the state and competing on price, he said. “With the market opening up and so much competition, commission income has been affected,” Gibson said. “And that’s another one of the dominoes.”

While Gibson hopes to avoid layoffs of support staff, he said he may have to consider reduction through attrition if the economic downturn persists. “We’ve already seen a 25 to 30 percent reduction in overall income,” he said. “I haven’t seen some of my site contractors in a while and we’re seeing bankruptcies in some of the utility site contractors.”

Georgia Slowdown

Just up the coast from Gibson in Savannah, Ga., Jackson Sherrill of Sherrill and Co., does not quite buy that a recession is in effect. “I do think we are in a slowdown and certain sectors of the economy may be in a recession,” Sherrill said. “I have clients who were paying subcontractors more than $10,000,000 in building costs last year, who this year, are probably going to build less than half to a third of that.”

The current economy is affecting commercial lines more than personal lines, according to Sherrill. The lower payroll or receipts go, the lower the workers’ compensation and general liability premiums and commissions on those accounts, Sherrill said.

“The people who are getting hurt in this slowdown, in my opinion, are the small to mid-size contractors who have put money in the ground on ‘spec’ houses or offices and can’t sell them – and their subcontractors who are seeing the volume of work shrink substantially,” Sherrill added.

While the value of homes is going down, replacement cost is not, he said, because the cost of construction is not going down.

Sherrill keeps a realistic view. “I don’t see doom and gloom out there for the most part, but it has been a lot better,” Sherrill said. “It’s a challenge though, and it may get worse before it gets better.”

Stew Borger, of Smith-Nadenbousch Insurance in Martinsburg, W. Va., says he has never seen an insurance industry cycle and an economic cycle run together – in the same direction.

Borger primarily blames the over-zealous building sector for the slump, which he thinks falls short of a recession.

“In our area the problem is the real estate bubble-burst,” Borger said. “Berkley County (West Virginia) is in close proximity to D.C. and lots of commuters live here. Three trains leave here every morning going to D.C. and Baltimore.”

Builders overbuilt and now contractors’ payrolls and receipts have gone down, affecting the entire local economy, Borger said.

“I have a client who is a painting contractor who has only worked two days since Christmas. That kind of thing can lead to recession,” he said.

Tennessee Troubles

For Tennessean Dave Porch, of Porch-Stribling-Webb Inc. in Waverly, rising oil costs and the “greed of the oil companies” are at the root of the economy’s troubles.

“Oil greed is going to wreck the global economy,” Porch said. “When workers have to pay $3 a gallon to drive an older car 50 miles roundtrip to a job that pays $8 an hour, and with auto maintenance going up, employees’ part of health coverage going up – they start to wonder if they would be better off staying home and collecting welfare,” Porch said. “That in turn dries up a lot of local businesses: restaurants, grocery stores, car dealers.”

The property and casualty industry in mid-Tennessee is somewhat insulated due to the positive growth in Nashville, Porch said, but in general he thinks a recession is already in place. “Business in general is very soft,” he said. “All of our commercial business customers are reporting lower sales. Commercial premium is dropping off. Contractor customers are reporting their payrolls are down which means premium is down.”

As competition intensifies, there is a ripple throughout the industry. “Because of the poorly performing economy, insurance companies are under pressure to keep sales up, but it’s hard to grow when your book is shrinking,” Porch said. “Everything is more competitive.”

Porch says he is seeing carriers more willing to take chances on riskier accounts. “It is creating opportunities for insurance sales because carriers are aggressively seeking business,” Porch said. “Carriers are willing to do their part to keep the industry moving forward. The soft market makes them do things they wouldn’t normally do. Policies that cost $25,000 two years ago are now going for $17,000 to $20,000.”

Porch agrees that workers’ compensation is one line of insurance that is always affected in times of economic downturn. “When production is down, payroll is down and premium shrinks,” he said. “When demand for product shrinks and people don’t work the overtime that they might be accustomed to, there is less money in the pocket and less money goes into the economy. It’s a direct relational reduction. Premium is based on payroll.”

For Stephen Reimer of the Florida-based Reimer Insurance Group, the recessive economy is working to his favor. “It’s putting people on the street who we want to hire,” said Reimer, who plans to open a new office in Tampa in April.

Additionally, Reimer said he can now acquire real estate at bargain prices.

Topics Agencies Contractors Market Construction