Catastrophe risk modelling specialist Moody's RMS estimates total U.S. economic losses from California's recent floods at $5-7 billion from damage to property and infrastructure. The insured losses are anticipated to be $0.5-1.5 billion, including losses to the National Flood Insurance Program (NFIP) and the private flood insurance market.
A series of extratropical cyclones starting December 26, 2022 hit the U.S. West Coast, resulting in heavy rainfall, overflowing rivers, flash floods, levee breaches, mudslides, fallen trees, debris flow, and heavy snow at high altitudes, together with some wind damage.
"Nowhere is safe from flooding in California today," said Firas Saleh, Moody's RMS director, product management, global climate. "If we've learned anything from this extreme rainfall and subsequent damage, it's that even perceived low-risk flood zones are still flood zones. If it rains, it can overflow."
Natural disasters disrupt homeowners' lives and raise performance risks in residential mortgage-backed securities (RMBS) due to missed payments and lower property values, according to Moody's April 2019 report "Climate change risks present challenges for housing-related sectors."
"Approximately 2% of loans in the Moody's-rated U.S. RMBS transactions are backed by properties located in the FEMA-declared disaster areas in California," Joseph DiMiceli, a vice president and senior analyst at Moody's Investors Service, told ASR. "Property damage from (California's) severe weather events will likely result in a temporary increase in delinquencies for the affected (RMBS) deals, but will be mitigated by insurance coverage and servicers' proactive disaster management. The proportion of the impacted loans could evolve as the full extent of the damage becomes clearer in the coming days."
RMBS deals remain vulnerable to disaster types for which property owners frequently lack insurance coverage, such as earthquakes and flooding outside of specified zones, according to a Moody's report, "Climate change risks present challenges for housing-related sectors climate change risks."
Most flood losses that businesses and homeowners incur in California aren't covered by insurance, according to a January 2023 AM Best report. "Historic California Flooding Highlights Need for Robust Private Flood Market". Only 2% of California households have flood insurance, including those protected by the private market as well as the NFIP, the report says. In addition, California accounts for 14% of U.S. GDP but only 10% of private commercial flood insurance coverage nationally.
"Homes in California protected by NFIP insurance may still be underinsured, given that NFIP insurance is limited to $250,000 per residence, well below California's median home value of nearly $685,000," AM Best senior industry analyst Christopher Graham said.
For commercial buildings, the amount of coverage for a specific type of loss is limited, according to Moody's Saleh. "Small and medium-sized firms who select NFIP commercial flood insurance are subject to the statutory flood limit of $500,000 for building and $500,000 for contents," Saleh told ASR. So, many SMEs could be underinsured for flood risk unless supplemented by excess of NFIP policies from a private carrier."
However, the overall effect of the floods on CMBS isn't dire, according to Christopher Bergman, an associate vice president and analyst at Moody's Investors Service. "Besides insurance, the potential damage from flooding is often mitigated by geographic diversity," he told ASR. Additionally, structural features such as master servicer advancing of debt service payments and reserve accounts provide liquidity, he said.
"While collateral performance may be impacted by either property-specific or surrounding area damage, natural disasters have historically resulted in minimal delinquencies in CMBS," Bergman said. "However, these types of occurrences have led to increasing insurance costs in impacted areas."
