In 1876, Commonwealth Title invented title insurance. Since then, it has grown to billions in annual sales by approximately 11 title insurance companies and 36 unaffiliated businesses.
This coverage is bought to ensure that the property has a clear title as of the date the policy was issued. If liens or other encumbrances later are found to be affecting the title (and they were prior to the policy date), the title insurance company will cover the costs of fixing the title up to a certain limit. These are just a few details about the coverage. There are also exclusions.
Title insurance is a direct benefit to the market because it guarantees title to both the purchaser and other parties to the transaction. It provides clear title assurance that is more comprehensive than any other method.
There are many important features to consider when determining the profitability, pricing, or reserving title insurance. Title insurance is different from traditional property casualty and this can have an impact on the calculations that actuaries make. These are the key differences:
- The policy’s time frame – Title coverage covers only events that have occurred, while traditional insurance coverages do not cover future events. Title insurance policies are not subject to expiry until the property is resold, refinanced, and most property casualty policies have a defined loss period.
- The costs are high in relation to the losses. However, high-quality research and data collection can significantly lower losses because hidden defects can be found before the policy is sold.
The key is to understand your expenses. The most expensive expense is for each property’s history/data, which must be collected daily by an actual person at the county level, and then verified. Their “title plant” is this database. If a title company begins to reduce the amount of expenses they put into their title plant, it can result in higher losses. Title underwriting is intended to limit exposure through a thorough search of all recorded documents related to the property under consideration. Losses paid result from existing but not identified (and therefore not underwritten) defects in title condition. This is a major problem for new title companies. In the beginning, their profit margins will be severely affected by the costs of setting up the title plant.
Success is dependent on the ability to grow infrastructure, maximize profits in good markets, and contract and manage costs in bad markets. We are currently in a slow title insurance market, as the title market is closely linked to the real estate market.
Other expenses aside from the title plant, 3% to 6% are for loss adjustment expenses (LAE). Because most expenses are paid before the premium is collected, investment income is very small. The loss tail is quite long, which means that there is little opportunity to invest.
Policies are only written once to protect the risk. They expire when the property is sold. It is impossible to know the exact policy count or payment patterns if policies have been cancelled. However, it is possible to estimate the duration.
Two reserves are held by title insurers: a reserve for all cases (called the Known Case Reserve), and a reserve for the Statutory Premium Reserves. The SPR, a liquidation reserve is established by formula and statute. It is a mandatory IBNR reserve that is available for release over a period of 10-20 years. To support the SPR, investments are separated. A supplemental reserve is also available in the event that the SPR and known case reserve are less than the LAE and actuarially determined losses.
Kimberley A. Ward, FCAS. MAAA. FCA – Kimberley is a Partner at Windsor Strategy Partners. She can be found at their satellite office, Newark, IL. Kimberley was previously Chief Actuary at AAIS before joining Windsor Strategy Partners.
Kimberley is a Fellow in the Casualty Actuarial Society. She holds memberships in the American Academy of Actuaries Conference of Consulting Actuaries Project Management Institute, Association of Insurance Compliance Professionals, and the Conference of Consulting Actuaries.
Kimberley’s core expertise is in property-casualty pricing, reserving and product development. She also has experience with mentoring, strategic planning, education training, and employee development.
