States Gear Up for Stimulus Package

Impact on Insurance Industry May be Minimal, Experts Say

The $787 billion stimulus package passed by Congress looms as the largest mountain on the country’s newly changed economic landscape. But despite hope that the stimulus bill will jump-start spending, some insurance industry experts say the package will have little impact on the insurance world.

In a Web seminar on the stimulus package, jointly sponsored by the Insurance Information Institute (I.I.I.) and Fireman’s Fund Insurance Co., I.I.I. economist Robert Hartwig said despite the large size of the stimulus package, it will result in no more than a 1 percent impact on property and casualty premiums written — roughly $4.5 billion. And because the rollout of the stimulus could take more than a year, those benefits might not materialize until 2010 or beyond.

According Hartwig, the insurance lines most likely to benefit are workers’ compensation, commercial auto, inland marine, commercial property and liability, and surety.

The stimulus bill includes about $38.1 billion in new infrastructure spending, according to the I.I.I. Most of that money will go toward new construction, and it is that spending that will have some ancillary benefits for insurers, agents and brokers. 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 more than 1.2 million jobs because of the spending — meaning a noticeable improvement for those selling workers’ comp lines. Hartwig said the expected 3.5 million jobs overall would translate into roughly $1 billion in workers’ comp premiums.

Much Is Expected

Ken Caldwell, executive vice president of Chicago-based Aon’s construction services practices, chairs the firm’s infrastructure task force dedicated to assisting public entities with their risk management on stimulus-supported projects. Caldwell said while it would have been good to have a bigger slice of the funds for construction, the $130 billion to $140 billion being made available is needed and will be put to use.

“We do think the stimulus package, the infrastructure piece, will help tremendously,” Caldwell said, 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. “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 that comes from the stimulus should boost workers’ compensation in particular, he predicted. “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, workers’ compensation is 70 percent to 80 percent of the cost of those programs,” the Aon executive said.

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

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

John Carmody, executive director of The Advantage Group LLC, a network of 14 agencies in Washington, said his group hopes for improvement, but it may be in farther away 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, and environmental. That will probably have a more beneficial impact to brokers than main street agents that write small contractors.”

Some agents expect a benefit in that their clients will benefit — meaning they can keep paying premiums. “The biggest impact will be how it will affect clients,” said Mike Heffernan, president and CEO of the San Rafael, Calif.-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.”

A Big Impact

William Duckworth, senior vice president agency executive for Oklahoma City-based C.L. Frates and Co., and Frank Smith, vice president and head of that agency’s construction division, are already seeing an impact in their state and among their clients.

C.L. Frates, founded in 1924, is one of the oldest and largest agencies in Oklahoma, Duckworth said. He explained that about 15 to 20 percent of C.L. Frates’ book of business is made up of contractors, including those involved in heavy construction, and street, road and bridge work.

“Our feeling is that there’s going to be an appropriate reinvestment in infrastructure, including streets and highway work, which is particularly important for us in Oklahoma because there’s a substantial number of old bridges that are ready to expire in terms of their period of service,” Duckworth said.

Smith agreed that the stimulus will have a major impact on his clients’ and his agency’s business.

“It will have a big impact on us because of additional jobs being let by the Oklahoma Department of Transportation. [My] book of business is 90 percent or more Oklahoma contractors, and they’re going to have a lot of work. 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.”

He said his clients, especially those who specialize in major highway jobs are “hiring a whole lot of people. That is the biggest impact so far. I was at one of my customer’s offices [recently]. In a two-hour time period, I saw somewhere in the neighborhood of 30 to 40 applicants. They are gearing up.”

Smith said he believes that any agency that has clients involved in construction, especially in street and road construction, will benefit. He noted that even beyond road construction, “some of the stimulus money is going to go toward education and improvements to sidewalks and parks from what I understand. It will filter down to the cities and counties.”

Duckworth said in March alone there will be three different “lettings” or requests for bids on state and city construction contracts in Oklahoma, which is an unprecedented number for one month. “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.”

Some States ‘Ready to Roll’

The state highway departments already have reported plans for using their share of the stimulus money.

As of the first few days in March, for instance, Texas transportation officials were ready to sign off on $1.2 billion from the stimulus package for major road projects. The Arkansas State Highway and Transportation Department has allocated more than $28 million of the stimulus money for statewide rehabilitation projects.

Louisiana Department of Transportation and Development (DOTD) Secretary William D. Ankner said in a statement that his state is “ready to roll out the orange barrels” on more than $300 million in road and bridge projects. Most of the projects will be let to bid within 120 days, and two projects will go to bid within 30 days.

The Oklahoma Department of Transportation indicated that $340 million of its stimulus money is designated for highway projects to be released for bid in March. Improvements include interstate rehabilitation, and bridge and safety projects.

The Rush’s Downside

In the rush to get new projects started, Travelers’ Langer said there is the possibility 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,” Langer said.

Despite construction unemployment down in the mid-teens across much of the country, there could also be a problem as projects begin to ramp up, he added.

“Many firms had to reduce staff,” Langer said. “As contractors begin to ramp up and bid, there’s a question whether they will be able to find the labor. … From a contractual standpoint, it could be a problem.”

Added John Komidar, second vice president of Travelers Construction Risk Control: “The construction industry has been impacted by delays and job shutdowns, which have driven up unemployment and tightened operating budgets. 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 lines.”

Office Changes

Some insurance agencies could see benefits from the stimulus package that have nothing to do with premiums or the business they write, however. The package also includes some changes to the tax codes that could benefit owners — and buyers — of insurance agencies.

One of those changes is a provision that allows a company to change from a C corporation to an S corporation in seven years, rather than 10. That change could help speed sales and acquisitions of agencies, said Terry H. Buckner, president and CEO of The Buckner Co. headquartered in Salt Lake City.

“Some agencies looking to sell can now do that sooner, and move forward on a quicker basis, so we might see some action that’s helpful to brokers with regard to sales and acquisitions,” he said.

There are also administrative changes that insurance agencies — as employers — need to keep in mind. These include:

• Tax credits worth up to $400 for workers, which will be achieved by adjusting tax tables.
• Subsidies, in the form of tax credits for employers that can offset the cost of providing COBRA coverage to recently laid off workers.
• Minimum wage increases to $9.50 per hour by 2011.

Insurance Journal editors Stephanie K. Jones, Andrew G. Simpson and Patricia-Anne Tom contributed to this report.

Stimulus Money: The 5 Largest States

Source: Insurance Information Institute

Stimulus Money: Western States

Source: Insurance Information Institute

Topics California Texas Agencies Workers' Compensation Contractors Oklahoma Market Construction