An old and catchy tune that was popular in the early 20th Century and is still frequently heard noted how the bones of the body were connected, all the way from the toe bone to the head bone. Although the song, “Dry Bones,” has nothing to do with the Texas economy, it is a good analogy regarding the connectivity of various sections of the state to others.
The Independent Insurance Agents of Texas recently commissioned my firm to conduct a study regarding what impact a catastrophic hurricane on the Gulf Coast would have on the rest of the economy of the Lone Star State. Of prime importance were the extremely high increases in property and casualty insurance rates in the areas vulnerable to such storms and the prospect of such escalation undermining the capacity to maintain coverage and, thus, minimize disruptions.
Currently, this 14-county area, with its 5.6 million residents, accounts for approximately 30% of the state’s overall business activity and about 27% of aggregate income.
The area comprises virtually all Texas import activity and handles the vast majority of water shipments for goods produced for export throughout Texas. Among its many industries, petroleum and coal products [refining] and chemical manufacturing are critical inputs to production in a variety of other Texas industries and are essential to the viability of these sectors. For some industry groups, the Gulf Coast area is responsible for almost all of the state’s activity.
The Gulf Coast complex of petroleum refining operations has a crude operable capacity of more than four million barrels of refined petroleum products per day, an amount equal to 87% of the total for Texas and almost 25% for the entire United States. These products are essential to business activity throughout the state. From diesel fuel for agricultural operations in the High Plains to jet fuel for Texas-based airlines, the availability of refinery output is vital to the state’s economic stability.
With expectations for healthy growth in the future, the Gulf Coast area is projected to see an increase in its importance to the Texas economic vitality in the years ahead.
The Perryman Group study pointed out the regional dependency on industries in the Gulf Coast, noting that it varies from almost 33% of aggregate production activity for the Upper Rio Grande Region to more than 56% for the Golden Crescent and Texoma regions.
For the state as a whole, approximately 39% of the total real gross product and 44% of the total income is critically linked to the Gulf Coast area. From a regional point of view, the percent of income dependent on the Gulf Coast area varies from around 30% in the Central Texas Region to over 58% in the East Texas and Texoma regions.
Nationally, property and casualty insurance rates have generally been falling. Along the Gulf Coast, however, property and casualty rates have been rising sharply. Furthermore, availability has declined in the wake of catastrophic hurricanes in 2005. In areas considered particularly vulnerable to storms, some insurance companies are adjusting rates and underwriting criteria.
This rapid escalation in insurance expenses has enormous potential fallout, both within the directly affected area and across the entire state. Companies facing the doubling of property and casualty insurance rates will likely see competitiveness and profits diminish. In addition, some may elect not to purchase adequate coverage due to lack of affordability. The consequences of such actions are decidedly negative and have the potential to significantly damage the Texas economy.
The Perryman Group study indicated that if a Katrina-type hurricane struck the Gulf Coast, the state could lose approximately $50 billion a year in real gross product over the short term and perhaps up to some 600,000 jobs. If the storm punched through the Port of Houston directly, the output loss increases to about $70 billion during the next couple of years and around 850,000 jobs. In addition, the state budget would suffer a reduction in fiscal revenue of approximately $1.8 billion plus a loss of as much as $450 million yearly from premium tax offsets over an extended period.
An increase in insurance costs of the magnitude that is currently being discussed would lead to “dead weight” economic harms (higher costs without corresponding benefits). Moreover, it would contribute to underinsurance as firms and individuals elected not to pay the much higher premiums. In the event of a major storm, insurance insufficiencies would delay the recovery process and negatively affect not only the immediate area, but also the rest of Texas.
Without the key inputs and services provided by the industrial base located along the Texas Gulf Coast, prosperity and business activity—from the Panhandle to the Rio Grande Valley and from the Big Bend to the Piney Woods—would be significantly diminished.
In a similar fashion to the “Dry Bones” song, all sections of Texas are critically linked to the dynamic coastal area. As a result, the entire state has a strong economic interest in finding a workable solution to the current property and casualty insurance situation in and around the Gulf Coast area.