By DAVID MOON, Moon Capital
October 31, 2004
The next time you go to the beach, get a home magazine and look at the prices
of the prime waterfront properties. Now imagine the fairness of you
unknowingly subsidizing the price of a $2 million vacation home.
An executive from Allstate recently appeared on CNBC, explaining that the
company's huge decline in third quarter earnings was due to this year's
devastating hurricane losses in Florida. When asked if Allstate planned to
pull out of the seemingly meteorologically jinxed Sunshine State, he made the
case for a change in the structure of homeowners' insurance. 'There has to
be a new model of risk sharing ' determining how much of the risk will be
assumed by private insurers, the state and the federal governments. It
should be much like flood insurance.'
In other words, everyone should share the costs of rebuilding expensive homes
built in inherently dangerous locations.
The National Flood Insurance Program (FLIP) provides insurance for structures
located in flood prone areas. According to a 2001 Congressional Budget
Office report, FLIP policyholders pay only 38 percent of the actual cost of the
insurance they receive. Federal taxpayers (that includes most people who
read this page) pay 62 percent of the cost of this coverage.
The market price of buildings located in flood-prone property is artificially
inflated because the owners don't have to bear the full cost of ownership.
A hurricane insurance program like the FLIP would cause more every day, middle
class Americans to subsidize the cost of expensive waterfront property.
Many of these types of homes are out of the price reach of average
Americans - in part because their own federal tax dollars are being used
to inflate the prices.
In a June 2000 report, the Federal Emergency Management Association reports
that close to 87,000 homes and buildings have been built on land that is likely
to wash away during the next 60 years. Many of these are expensive
vacation homes, out of the financial reach of most Americans. Yet most
Americans are subsidizing flood insurance for these often wealthy
There are thousands of homeowners who have intentionally and knowingly built
homes that will probably suffer known, expected catastrophic damage, yet those
homeowners don't have to worry about the risk of their house washing away in a
flood; the federal government pays most of the cost of insuring that risk.
These are the types of home sites that are already attractive, because they are
on the water, with nice views and other natural amenities. Potential
buyers are willing to pay higher prices for these homes, partly because of the
adjacent water features, but also because the home prices are held artificially
lower by a taxpayer subsidy.
Would the federal government provide
subsidy and loss indemnification for new buildings erected on the peak of a
volcano that was about to erupt? Should a hurricane-prone location be any
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).