The Unique Characteristics of Title Insurance - An Overview

By Kimberley Ward

Invented by Commonwealth Title in 1876, the title insurance business has grown to billions of dollars per year written by about 11 title insurance company groups and 36 unaffiliated companies.

The coverage is purchased to guarantee a clean title to property as of the date on the policy. If later, liens or encumbrances are found to impair the title (and they occurred before the policy date) the title insurance company bears the expenses of repairing the title up to a specified limit. This is a very brief description of the coverage and there are exclusions.

The business of title insurance directly benefits the marketplace because it provides a guarantee of title to purchaser of property, as well as other parties to the transaction. It is more comprehensive than other means of assuring clear title.

When it comes to the profitability, pricing, and reserving of title insurance, several features of the product are important. Notably, title insurance differs from traditional property casualty insurance in several key ways and these ways affect the calculations actuaries make. Those key differences are:

• The time frame the policy covers - Traditional insurance coverages unknown future events, while title coverage only applies to events that have already occurred. Also, title insurance policies don't expire until the property is resold or refinanced, while most property casualty coverages have a fairly defined loss period.
• Expenses are very high relative to losses - All the research and data gathering for title insurance policies are done before any premium is collected, but high quality of research and data collection can dramatically lower losses as hidden defects in the title can be found and corrected before the policy is sold.

Expenses are the key. The highest expense is for the data/history of each property, which has to be gathered daily by an actual person, in most cases, at the county level and verified. This database is their "title plant". Unfortunately, if a title company starts scaling back on the expenses they pour into their title plant, the lack of information and verification can lead to higher losses. The title underwriting process is designed to limit exposure by thorough search of recorded documents relating to the property under consideration. The losses paid are from existing, but unidentified (and not underwritten) defects in the condition of the title.New title companies have a huge hurtle to overcome. The expenses from gearing up the title plant will severely impair their profit margins in the early years.

The ability to expand infrastructure and maximize profits during good markets and the ability to contract and control costs in bad market is key to success. Currently we are in a slow market for title insurance, because the title market correlates heavily with the real estate market.

As for other expenses other then the title plant - 3% - 6% is for losses and loss adjustment expenses (LAE). Investment income is all but insignificant given that most of the expenses of the policies are paid before the premium is even collected, making for very low financial leverage. However, the loss tail is very on the long side, so provides some very small opportunity for investment.

As indicated above, policies are written once for the risk and do expire upon selling the property. However, there is no notification when policies are no longer in force, so an accurate policy count or payment pattern is not possible. Still, duration may be able to be estimated.

Title insurers carry two reserves: A reserve for all known cases (called the Known Case Reserve) and the Statutory Premium Reserves. The SPR is a liquidation reserve, established by formula by statute. It is basically a mandated IBNR reserve and is released over 10-20 years. Investments are segregated to support the SPR. Should the known case reserve and the SPR be less than the actuarially determined loss and LAE, a supplemental reserve would also be put up.

Kimberley A. Ward, FCAS, MAAA, FCA - Kimberley serves as Partner at Windsor Strategy Partners and is located at their satellite office in Newark, IL. Prior to joining Windsor Strategy Partners, Kimberley served as Chief Actuary at AAIS. Kimberley is a Fellow of Casualty Actuarial Society. She is hold memberships in the American Academy of Actuaries, Conference of Consulting Actuaries, Project Management Institute and Association of Insurance Compliance Professionals. Kimberley's core expertise includes property-casualty actuarial pricing, reserving, product development, project management, mentoring, strategic planning, education, training and employee development. See Kimberley's blog at http://viewivorytower.blogspot.com and her company's website at http://wspactuaries.com