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Property Insurance Is Costly, Scarce in Gulf

A year after major storms hit the Gulf Coast, one significant fallout for the commercial real estate sector is an increase in the cost and a decrease in the availability of windstorm insurance. The total insured losses on Hurricanes Katrina, Wilma and Rita are about $52 billion, according to an estimate by the Insurance Information Institute (with Katrina alone, at over $38 billion, ranking as the No. 1 catastrophe in recent U.S. history on an insured loss basis, compared to the over $18 billion in insured loss associated with the 9/11 attacks on the World Trade Center and the Pentagon).

Industry participants say that insurers are hiking up premiums to provide windstorm insurance for commercial real estate and that some are altogether not willing to provide it. For servicers, this is a situation somewhat reminiscent of the period following 9/11. Stacey Berger, a Bethesda, Md.-based EVP with Midland Loan Services told Commercial Servicer that there is less windstorm coverage available than there was a year ago and that it is costing more. He noted, "In response to lawsuits last year, it has been very difficult to get windstorm insurance for commercial properties depending on where you are physically located. It's also extremely costly. There are issues around servicing administration of insurance not dissimilar from terrorism insurance where you had similar issues."

Increases in insurance costs are having an impact on property incomes as borrowers are required to pay more for insurance coverage and are even then faced with "less coverage, higher deductibles and in some cases inferior insurance companies." Midland has heard of increases ranging from 100% to 300% in the cost of insurance.

For properties impacted by last year's storms, the servicer is making advances on principal and interest based on their judgment as to the recoverability of the amounts advanced. Situations of shortfalls in principal and interest on commercial mortgage-backed securities bonds are working their way through the transaction waterfall, with the investors at the bottom of the waterfall likely to be shorted. As Mr. Berger sees it, "There are not a lot of such situations. In the bigger scheme of things, it is not very significant."

The fallout from the reduced windstorm coverage availability could have an impact depending on how the current hurricane season plays out. Lenders are deciding as to what level of coverage is appropriate, with one precedent being the level of insurance in place previously on a property. Servicers are making determinations about whether coverage is adequate or not, using their judgment and discretion, Mr. Berger said.

According to a bulletin put out by Bernard Brown, a Stamford, Conn.-based insurance consultant, deductibles on windstorm insurance are now at least 5% of value, up from 3%. He has even seen quotes containing 10% deductibles, "which really begs the question if such coverage is of any value or not." Mr. Brown reports that renewal pricing is "going through the roof" for Southeastern property owners. Depending upon the property type, location and loss history, premium increases for property insurance, including wind, are increasing by up to 100% to 300% or more, with older multifamily properties getting "clobbered." And some insurers are cutting back on their coverage and some, such as RSUI and Allstate, are altogether getting out of the market.

Loan originations in the Southeast are suffering as a consequence, with buyers not able to get a quote for a policy until the hurricane season ends in November, according to Mr. Brown. He recounts, "A certificate came across our desk recently that stated prominently 'wind included.' A footnote at the bottom stated: 'Named storms excluded.'" Mr. Brown doesn't expect the catastrophe insurance situation to change until at least early next year, and that's assuming no major storms hit this year. "The cost and availability of coverage will only plateau and not necessarily soften," he believes. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com