The American Title Insurance Industry: How a Cartel Fleeces the American Consumer

7. Title Income and Losses

7 Title Income and Losses A Financially Solid Industry The title insurance industry is immune to catastrophic events. There are no title tsunamis or damages induced by acts of terrorism, such as the destruction of the twin towers at the World Trade Center, to generate massive claims. Furthermore, it is likely that the incidence of title defects has been declining. Only two direct title insurance companies have gone bankrupt, and in both cases it was due to fraud and defalcation by members of the management team. There was an eleven-year period from 1980 to 1991 when the Form 9 data revealed pretax losses by the direct title insurance companies ;1 it is not known why such losses occurred in that period. Since 1992, however, the industry has prospered. According to publicly available statistics, losses and loss adjustment expenditures have declined to around 4 percent of premium income. As table 7.1 documents , other types of insurance experience much higher losses. 155 Table 7.1 Losses and Operating Expenses for U.S. Insurance Types Average 1968–1994 Average 1980–1994 Losses/ Operating Losses/ Operating Loss- Expenses/ Loss- Expenses/ Adjustment Operating Adjustment Operating Type of Insurance Expenses (%) Revenue (%) Expenses (%) Revenue (%) Direct title insurance companies 6.6 90.1 7.9 93.4 Boiler and machinery stock companies 40.0 54.9 43.8 53.4 Surety stock companies 44.3 49.6 45.4 47.8 Property and casualty mutual companies 76.2 28.7 80.6 28.5 Property and casualty stock companies 79.2 22.7 83.4 22.2 Source: American Land Title Association, Title Insurance Statistics 1995 (Washington, DC: American Land Title Association, 1996), p. 18. Headings were modified for purposes of clarification. Title insurance spokespersons credit the industry’s low losses to an active “loss prevention” program. This explanation does not account for the discrepancy between loss ratios in the title insurance industry and those in other insurance industries, however. Most insurance companies engage in risk-reduction procedures. They check the credit of applicants, the characteristics of the property, or the health of the person to be insured. They look at prior claims made by or paid to insurance applicants. Other insurance lines have no way to forecast which of their customers is likely to be victimized in the future by a covered mishap, such as a tornado, hail storm, or fire. There are no similar future catastrophic events in the title insurance field. Owners and lenders are being insured almost entirely for isolated title defects that were recorded in the past, before the current insurance policy was issued. In 2005, the surplus owned by the policyholders in the industry as a whole was reported to have been $3,542,796,625, close to one-third of their total assets excluding separate accounts (32.45 percent).2 Executives may be modestly paid. In a Wall Street Journal report, the head of the Concord Abstract Corporation claimed a six-figure salary and the owner of another agency claimed that he cleared about four hundred thousand dollars per year after expenses.3 No industrywide salary data are available for the various specialists and executives, however . Most direct title insurance companies have a confidence-inspiring balance of income over expenses that justifies their being highly rated for investment purposes. In addition to their earnings from insurance premiums, insurance corporations generate income (and occasional losses) from investments of their reserve and surplus funds. They also make money from rendering other real estate–related services, such as tax calculation, flood certification, credit reporting, property appraisal services, and home and warranty assurance. Export of title guarantee services to other nations is another source of income. Little information is available about the industry’s income distribution. Most of it is retained by the local title abstract and settlement offices, averaging more than 90 percent. Nationwide, this small “risk coverage” portion was reported to be close to eighteen billion dollars ($17,773,385,302) in 2005. Administrative expenses are high, just short of 91 percent.4 Losses and loss administrative costs are small. We found no evidence that any state requires that the direct title in156 Title Income and Losses surance companies explain their high administrative overhead. Without such actuarially verified information, rate regulators lack an objective basis for adjusting future mandated premiums. In most states it is required that they be set at a level that is fair to investors. Rates...