Moody's Eyes Flood Insurance, CMBS Risk

Current practices for providing flood insurance may not fully address risk for commercial mortgage-backed securities investors, according to a report from Moody's Investors Service prompted by Hurricane Katrina.Katrina has brought the issue into focus, since a large part of the storm-related damage was caused by flooding. "In contrast to wind storm coverage, flood insurance is much harder to obtain from private insurance carriers and, when obtained, it is saddled with material quantitative and qualitative limitations," said Moody's analyst Daniel Rubock. "The first $500,000 layer of flood insurance for commercial owners usually is obtainable only under FEMA's National Flood Insurance Program." This $500,000 coverage, which is for the actual cash value of an asset rather than its replacement cost, is the maximum available coverage, according to the rating agency. And most CMBS loan documents allow for flood insurance coverage at replacement cost or the $500,000 NFIP maximum (whichever is lower), which Moody's believes could be a problem. However, Moody's said it expects that "even if the probabilities of flood damage are stressed, there will be little effect on investment-grade ratings." Moody's can be found online at http://www.moodys.com.