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.
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.
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.