Charles Jones Blog
It seems the downturn in the real estate market has done little to deter ongoing government scrutiny of the title industry. In our area of the country alone, there have been two public hearings in the past month or so. Maryland held one on June 25 and Pennsylvania held one on May 28.
Details and transcriptions of the Pennsylvania hearing can be found at:
The Pennsylvania Insurance Department called the meeting to: “…consider the full scope of issues currently under consideration within the department, including the public policy issues raised by the current rating system and market practices such as how rates are implemented by companies and agents, compensation to title agents, the use of affiliated business arrangements, and the payment of compensation or profit-sharing based on the referral of business.”.
In an effort to keep you informed on changes in the industry, Signature Information Solutions® attended the Pennsylvania hearing and we have the following observations which include an unusual analogy offered by one “expert”, an interesting fact about Pennsylvania title insurance, a political candidate’s strategy and how it relates to title, and finally perspective from the Insurance Department Commissioner as well as a few questions we ask you to ponder..
In regard to the unusual analogy, one economist cited a comparison to car insurance rates and then incorrectly compared title rate premiums from different states.
Dr. Nelson Lipshutz, who has conducted numerous statistical reporting systems, later explained that Pennsylvania rates contain all five of the components that may or may not be in included in other state rates: 1. Risk Assumption, 2. Search, 3. Examination, 4. Closing, and 5. Escrow.” Thus, comparing Pennsylvania’s rates with another state that may only include some of these may not provide a proper comparison.
Is title insurance a political football? Maybe. Attorney General Tom Corbett and his office offered both written and oral testimony where the notion of “reverse competition” was raised (competing for the referral from an intermediary rather than the consumer). It’s worth noting that Corbett has announced his candidacy for governor in 2010 and even Commissioner Joel Ario mentioned that the hearing was essentially called at Corbett’s request. Looking for an election issue, anyone? Home values are down, transactions are down, risk is up, but title remains the poster child for political backlash.
The Commissioner tried to put the hearing in perspective when his staff explained that they “get very few consumer complaints about the claims handling process…and when there are problems, they’re solved”. In Pennsylvania, title insurance premiums accounted for less than one half percent of all insurance premiums paid and the title agent community was less than two percent of all insurance agents. In other words, this is not the biggest fish they have to fry.
However, among the chief concerns raised by the Insurance Department was the lack of data surrounding the agency portion of the premium. Frequently cited as a “commission” during testimony, the department expressed concern over how to measure whether the rate simplification, rate changes, and Rate Manual revisions proposed by the Title Insurance Rating Bureau of Pennsylvania (TIRBOP) could be properly evaluated without a better understanding of why the “commission” is so much higher than in other lines of insurance.
Among their considerations were deregulating the agent portion of the premium to address the reverse competition notion to foster more traditional competition to drive down the price for consumers. Commissioner Ario: “Why not go to a risk system as lenient as we can be on the side of just regulating the risk premium and administrative expenses of the insurer, and leave the rest of it to the open market?” To paraphrase the Commissioner, although most of the cost is on the agent side, why would a regulator regulate the “black box” of the agent side when they have no data or working knowledge on that side of the business?
Dr. Lipshutz, responded to this idea by tying the result to insurer solvency. “If you allow competition to become excessive to the point that rates are so low that solvency can’t be maintained, you will have severe problems in the industry.” Essentially, since the agent does most of the underwriting research and curative work, creating incentives for them to cut corners would raise claim rates and harm insurers
Another possible regulatory structure on which the Commissioner sought comment was a “maximum system” where premiums charged below the filed rates would be allowed and the Department would focus its regulatory emphasis on where to set the premium cap.
The Attorney General’s office offered further comments after the hearing that cement his concerns. Those comments can be found in their entirety here: http://www.ins.state.pa.us/ins/lib/ins/consumer_liaison/ag_additional_comments.pdf. In those comments he indicates the last detailed study of agent cost structures was done in 1984 and he is clearly pushing for an update.
“This Office encourages and offers its support to carefully examine the “black box” of title agency costs and, in so doing, identify needed reforms for the title insurance industry. While recognizing the importance of regulating risk-based activities of title insurance companies and agents, the deregulation of non-risk related activities of title insurance companies and agents would foster choice and competition for the benefit of Pennsylvania consumers. Such deregulation would require some legislative changes. In the meantime, the Department can adopt maximum rates or allow title agents to discount below the maximum rate to consumers.”
Now we ask … Would de-regulating the agent’s portion of the premium help or hurt the industry? Are you favorable to a possible cap on premium services where lower fees could be charged? In what other ways might the industry change in the next couple years?