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Slade Smith's Blog

Will the Supreme Court hear the low title insurance claims rate canard?
by Slade Smith | 2011/11/21 |

Once again, somebody who should know better is using the title insurance industry's low claims rate compared to other types of insurance as evidence that something is wrong with the industry.  In this case, it's one of  the lawyers responsible for bringing the RESPA class action lawsuit Edwards v. First American, which has gone all the way to the Supreme Court and will be heard later this month.

Slade Smith's Blog ::

From the Cleveland Plain Dealer:

Edwards learned about the referral deal between First American and her title insurance company, Tower City Title Agency, through mail she received from lawyers at Cleveland's Fair Housing Clinic, who discovered it during a previous court case. She agreed to act as plaintiff for a potential class-action lawsuit that could involve hundreds of thousands of people, according to clinic attorney Edward G. Kramer.

Kramer says First American bought shares of 184 businesses in 15 states to obtain exclusive referrals, as it did with Tower City. He described the title insurance business as "monopolistic," with four firms, including First American, writing 90 percent of all policies. He said property and casualty insurers typically pay out two-thirds of the premiums they receive in claims, while title insurers pay out less than 5 percent of the premiums they receive.

"To me, that seems to be a fairly lucrative business," Kramer said.

Cleveland Plain Dealer

Kramer's observation that the business of title insurance underwriting has become concentrated in just a few firms is well taken.  But if he had looked into the history of the title insurance business, he would have seen that consolidation in the title industry has been accompanied by rising claims rates, not lower claims rates.  As I have noted before, several decades ago, before the title insurance business was consolidated into a few national firms, claims rates were much lower than they are now-- as low as 2.5%.  The claims rates now-- which aren't below 5% as Kramer claims and have not been so for several years-- are much higher than they used to be.  

Using Kramer's logic, consolidation and/or monopoly would lead to even lower claims rates over time.  That has clearly not happened.

It bears repeating:  Low claims rates in the title insurance industry would be a good thing-- for everybody involved.  The lower, the better.  It would mean that title insurance premium dollars are being effectively used to find title problems and correct them before they become claims-- which is exactly as it is supposed to be.  In a healthy, low claims rate environment, title underwriters would indeed be profitable, but they would have earned it, by insisting on and ensuring high standards of title work.

There is a connection between lack of competition in the title industry and claims rates, but Kramer has apparently missed it.  In the title industry of today, where businesses is locked up via non-competitive arrangements involving the referrers of title business, and the firms which are responsible for doing title work aren't able to effectively compete on the merits of service, the quality of title work goes down, and claims rates go up.  In such an environment as exists today, premiums may go up, but the title business itself becomes less lucrative, as title income is siphoned off as unearned income by the referrers of title business. 

 

 

 




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785 words | 3988 views | 3 comments | log in or register to post a comment


I don't think that was his point...

I think that what Mr. Kramer was trying to point out was that claims are not a deterent to the monopolistic tendencies First American has shown by essentially buying an exclusive stream of referrals.  The fact is that the title insurance claims rates are vey low, even though they have risen lately, and it is still very profitable for First American to violate RESPA. In the casualty market, the claims rates are so high, that it might not be advantageous to buy up business in this manner.  In fact, there is generally an advantage in insurance markets to spreading risk - that doesn't really apply in the title insurance industry.

The real problem here, as I see it, is First American seem to be of the opinion that it can violate RESPA as long as it doesn't charge higher premiums than the other underwriters.  They are basically giving a raspberry to consumers and saying "what are you going to do about it?"

If the Supreme Court rules against Edwards, we might as well scrap RESPA.

 
by Robert Franco | 2011/11/22 | log in or register to post a reply

I agree with the last sentence...

If Edwards loses, RESPA is can indeed be kissed goodbye... and unfortunately, my take is that we might as well pucker up now and prepare for the farewell smooch.

I'm not sure about any of your other points.  Assuming his argument was paraphrased correctly by the report, the lawyer is making the same simple misleading point that we've seen in Barrons and elsewhere-- that title insurance is more lucrative than other forms of insurance because the claims ratio is lower.  It's a misleading and unfair comparison, especially when made to an audience that isn't familiar with title insurance, such as the readers of the Plain Dealer... or the Supreme Court.  (Fortunately, I've been assured that this lawyer won't be arguing before the Supreme Court, and that the lawyers that will have been schooled on this.)

If he was trying to make a different point, such as the one that you believe he might have been trying to make, I don't think such points hold much water.  Due to the expense structure of the title insurance business, there's just no apples to apples comparison to be made between the claims ratios of title insurers and P&C insurers.  We've seen recently that every major title insurance company was losing money  with claims ratios in the 10% to 15% range, still far below the claims ratios of P&C firms.

I don't agree with your point about there not being an advantage to spreading risk in the title insurance industry.  We've seen more than one regional underwriter go under in the past six months or so precisely because they were not big enough to adequately spread their risk.  Southern Title, it appears, was taken to its knees by one large fraud.  I'd argue that in the title insurance business, spreading risk is even more advantageous than in many other forms of insurance, because the claims are few but tend to be large when they occur-- without sufficient scale, one large claim might be all that it takes to bankrupt a firm.  The NAIC apparently takes this view too... it was recently reported that they are concerned about the capitalization of the smaller title underwriters after the recent failures.

 
by Slade Smith | 2011/11/22 | log in or register to post a reply

Reply

I wonder how First American would defend the argument that if title agents and title insurers can spend millions of dollars to buy their business by giving a significant portion of their profits away to their affiliates, then title insurance rates are too high. It is a logical, albeit simplistic, progression. Reducing filed title rates would be devastating to small independent agents who are trying to follow the rules, but may not have significant impact on the title behemoths. I am glad there are organizations who are trying to provide an accurate and complete picture of the title industry. I am also glad there are news sources that are not afraid to provide a forum for alternative viewpoints.

 

 
by J. H. | 2011/11/22 | log in or register to post a reply
Slade Smith's Blog

I'm the web developer for Source of Title.  Due to this role, I have become an interested observer of the title insurance industry and the broader issues arising out of real estate and finance.   I have also blogged extensively about politics under the pseudonym "skymutt" at the partisan Democratic blog Daily Kos and the non-partisan community Swords Crossed

 

 

 

 

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