By DAVID MOON, Moon Capital
September 25, 2005
Critics of TennCare used to describe
it as a medical insurance program that didn't require you to enroll until after
going to the doctor. I am afraid we are about to see federal flood
insurance work the same way in reconstructing homes along the Gulf
Since 1968, the federal government
has been responsible for underwriting residential flood insurance in this
country. The insurance is grossly under priced, so all taxpayers are already
subsidizing the cost of homes in flood prone areas, including multi-million
dollar waterfront properties.
Although the insurance is supposedly
mandatory, The Economist magazine reports that only 20 percent of Mississippi
coastal residents and less than half of the damaged homes in New Orleans carried
any flood insurance. These homeowners were betting that if a perfect storm
ever did sink their homes, the federal government would bail them
By paying these negligent homeowners
a nickel, we are feeding a stray, rabid dog who will keep coming to the back
porch looking for food. Why would anyone buy flood insurance if paying the
premium is not a prerequisite for filing a claim and getting a check? Sign
me up for some auto coverage like that. I'll call if someone steals my
truck, and the guy from the federal truck insurance plan can send me a new one.
Otherwise, I'll just keep my 350 dollars every six
This is not an attack on poor people.
People who can't afford automobiles to evacuate probably don't own houses. These
are middle and upper class folks ' people who can afford flood insurance, or
they shouldn't be buying waterfront houses.
We must not hold harmless those
individuals who were warned and financially capable of protecting themselves
against flood losses. Those folks must be made to live with the financial
consequences of their business decisions, or else countless others will die in
future natural disasters. The federal largess in passing out dollars for the
reconstruction of residential New Orleans might impact the number of people who
die in the next similar natural disaster.
According to the Southern California
Earthquake Center, there is an 80 to 90 percent chance Los Angeles will
experience a (Richter) magnitude seven earthquake in the next 20 years.
The US Geological Society says that an earthquake of that size in Los Angeles
would kill 18,000 people, yet folks continue to build homes on cliffs and other
unstable areas that will, most likely, not survive this massive
earthquake. Yet insurers estimate that less than 20 percent of quake-prone
Californians purchase earthquake insurance. If people believe they have no
financial risk from earthquakes, they will continue to build expensive tinker
toy mansions. By absorbing the financial losses incurred by irresponsible
homeowners in New Orleans, we will encourage even more risky behavior in
Southern California ' and these risks will eventually cause additional
This column isn't about New Orleans
or flood insurance. It is about priorities and the problems of short-term
thinking. Investors are more concerned about the last six months than the next
20 years. Retirement is less important than driving a BMW. And the gorgeous view
from our homes is more important than the seemingly remote possibility the house
might fall off a cliff. If we remove the financial disincentive from these risky
construction decisions, we just encourage more short-term, risky
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).