Joseph L. Petrelli, Demotech, Inc.
614 -761- 8602
Incorporated in 1985, Demotech, Inc. is a financial analysis
firm serving the P&C and Title insurance industries. In 1989,
we became the first company to review and rate regional and
specialty insurance companies. In 1992, we became the first
company to review and rate Title underwriters.
2
1.
Title insurance coverage is retrospective, from the
policy effective date.
2.
P&C insurance coverage is prospective, from the policy
effective date.
3.
These timeframes of coverage in conjunction with cost
containment activities have not been properly reflected
in Title insurance financial reporting requirements.
Although Demotech, Inc. first discussed this in 2006,
regulatory authorities have not yet adopted procedures
and practices to address the situation. A grass roots effort
by title agents would be helpful.
Let’s take a fresh look at Title insurance and the coverage
provided in a Title insurance policy.
4
The term “title insurance” means a contract of insurance
against loss or damage on account of encumbrances upon or
defects in the title to real estate.
5
The term “title search” means a search and examination of the
public records sufficient to determine:
1.
Ownership of;
2.
Encumbrances on;
3.
Liens on; and
4.
Defects in the title to;
the real estate that is the subject of the search.
6
Summary of some covered risks under the American Land
Title Association (ALTA) Loan Policy – 2006 edition.
1.
Title being vested other than as stated in Schedule A
2.
Any defect in or lien or encumbrance on the Title. The
Covered risk includes but is not limited to insurance
against loss from …
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A defect in Title caused by:
1.
Forgery
2.
Fraud
3.
Undue influence
4.
Duress
5.
Incompetency
6.
Incapacity
7.
Impersonation
8
8.
Failure to authorize a transfer or conveyance
9.
Improperly created, executed, witnessed, sealed,
acknowledged, notarized or delivered document(s)
10.
Documents executed under falsified, expired or otherwise
invalid power(s) of attorney
11.
Documents not properly filed, recorded or indexed in the
Public Records
12.
Defective judicial or administrative proceeding
9
13.
Lien of real estate taxes or assessments imposed on the
Title by a government authority due or payable, but
unpaid.
14.
Encroachment, encumbrance, violation, variance or
adverse circumstance affecting the Title that would be
disclosed by an accurate and complete land survey
15.
Unmarketable Title
16.
No right of access to and from the land
10
Subject to the exclusions from coverage, the exceptions
from coverage contained in Schedule B and the conditions
and stipulations, the Title insurance company, as of the
Date of Policy shown in Schedule A, against loss or
damage…
Coverage is Retrospective.
In Consideration of the Provisions and Stipulations herein,
the Property and Casualty Insurance Company, for the
term of this date at 12:01 a.m. to one year later at 12:01
a.m. at the location of the property involved, does insure…
Coverage is Prospective.
P & C is Prospective
Date of Policy
Incident must have occurred
prior to policy date to be
considered covered
Date of Policy
Title is Retrospective
Incident must occur within
policy
period
to
be
considered covered
13
National Association of Insurance Companies (NAIC) Casualty
Actuarial Task Force Recommendation to the NAIC’s
Accounting Practices and Procedures (Ex4) Task Force.
To eliminate confusion arising from the association of the
term “allocated” with the ability to assign expenses to a
specific claim, NAIC approved a Blanks proposal in 1999.
Loss adjustment expenses were no longer “allocated” or
“unallocated” rather “Defense and Cost Containment” or
“Adjusting and Other.”
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1.
Surveillance expense
2.
Litigation management expense
3.
Fees or salaries for appraisers
4.
Fees or salaries for private investigators
5.
Fees or Salaries for fraud investigators
6.
Attorney fees incurred owing to a duty to defend, even
when other coverage does not exist
7.
Cost on engaging experts
15
1.
Fees of adjustors and settling agents
2.
Attorneys fees incurred in the determination of coverage,
including litigation between the insurer and policy-holder
3.
Fees or salaries for appraisers, private investigators,
hearing representatives, fraud investigators in the
capacity of an adjustor
16

An expense directly allocated to a particular claim or
incident.

Addressing specific defects

Everything in Schedule B?
The profitability of title underwriters or Title agents will not
change if curative and mitigation expenses are more
accurately allocated from “agent retention” to “loss
adjustment expense.”
An initial study prepared by Demotech, Inc. suggests that the
Title industry loss and LAE ratio, on this proposed basis,
would increase by 70%, to about 78%, and the Title industry
expense ratio would decline by 70%, to about 25%.
The net effect? Title operating results are comparable to P&C
results!
18
Regrettably, the financial reporting necessary to accomplish
this has not been promulgated.
Absent the financial
information needed to silence critics of Title insurance,
regulators remain focused on perceived excess profits in the
Title insurance industry.
Recent events indicate to me that agents are in the crosshairs.
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General Information
1Calendar year reporting
2State reporting for
3Agent/Agency/Firm Name
a) d/b/a (if applicable)
Federal tax ID/SSN (for Underwriter Direct Operations: use NAIC
4 Company Code)
Parent Company EIN (if applicable) (for Underwriter Direct
Operations: use NAIC Group Code)
5License number (for this state)
6Address (line 1)
Address (line 2)
City
State
Zip
7Contact person
8Contact phone
9Contact e-mail
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Agency Information
10Independent
11Affiliated (owned by underwriter)
12Underwriter direct
Is reporting agent an Affiliated Business Arrangement (affiliated
with real estate brokerage, mortgage company, etc.)?
13 (Y)es/(N)o. If Yes, List affiliated business names on Appendix A
14Agency/Branch Type:
Title & closing (full service)
Title only
Closing only
Attorney title
21
Agency Information
15State of domicile/residence of Reporting Entity/Person
Number of states in which Reporting Entity operates (list all states on
16 Appendix) A
17Date originally licensed (for this state)
18Percentage of business for this state (by premium)
a) Percentage of law firm revenue
Number of underwriter appointments, contracts, or agreements. (List
19 underwriters and percentage of business for each on Appendix A)
22
Agency Information
20 No. of employees (total FTE - as of last date of reporting period)
a) No. of FTE on March 31 (end of Q1)
b) No. of FTE on June 30 (end of Q2)
c) No. of FTE on September 30 (end of Q3)
d) No. of FTE on December 31 (end of Q4)
21 Licensed employees
a) No. of licensed FTE on March 31 (end of Q1)
b) No. of licensed FTE on June 30 (end of Q2)
c) No. of licensed FTE on September 30 (end of Q3)
d) No. of licensed FTE on December 31 (end of Q4)
List licensed employees (both allocated and unallocated employees) accounted for in Lines
21(a), (b), (c), and (d) on Appendix A
22 Unlicensed employees
a) No. of unlicensed FTE on March 31 (end of Q1)
b) No. of unlicensed FTE on June 30 (end of Q2)
c) No. of unlicensed FTE on September 30 (end of Q3)
d) No. of unlicensed FTE on December 31 (end of Q4)
23
Risk Assumption
23 Open Title Orders
24 Closed Title Orders in Which Policy Was Issued
25 Total number of policies issued in reporting period
a) Residential Policies
b) Non-residential Policies
26 a) Number of searches billed to 3rd parties
b) Number of searches purchased from 3rd parties
27 Number of non-insurance title products produced
28 a) Total settlement/escrow/closing transactions conducted
b) Number of line 28 that were sale/purchase settlement/escrow/closing transactions
Number of settlement/escrow/closing transactions conducted in which a title policy was
29 not issued
24
Income
30Premium written
31Premium remitted to underwriters
32Settlement/closing/escrow income
33Title examination income
34Abstract/search income
35Income from cancelled orders
36Investment income
37All other income
38Total income (automatically totals)
25
Expenses
39 Employee compensation
40 a) Contract labor (1099)
b) Temporary labor (non-1099)
41 Payroll taxes
42 Employee Benefits
43 Rent, utilities, and repair
44 Title plant maintenance/subscription expenses
45 Abstract/search expenditures
46 Computer/software
a) Depreciation (if applicable)
47 Business insurance
48 Business legal
49 Accounting
50 Licenses, taxes, and fees
51 Marketing/sales
52 Travel and lodging
53 Employee education
54 Bank charges
55 Charge offs
56 Miscellaneous expense
57 Total business expenses (automatically totals)
26
Loss, Loss Mitigation, and Underwriting Expenses
58 Title losses paid and not reimbursed by underwriter or included in underwriter loss reserves
a)Title Loss Files Opened
b) Title Loss Files Paid
c) Reimbursements paid to underwriter for title losses
59 Closing/Escrow losses
a) Number of Closing/Escrow Losses resulting from escrow shortages
b) Total amount of funded shortages
60 Abstract/search losses (from abstracts/searches sold)
61 Title loss-related and Closing/Escrow loss-related legal expenses
62 Deductibles paid
63 E&O insurance premiums
64 Fidelity/Surety bond premiums
65 Total loss expenses (automatically totals)
66 Total expenses (automatically totals)
67 Net income before taxes (automatically totals)
68 Federal income tax incurred
69 Net income (automatically totals)
27
Risk Identification including Mitigation
Schedule B – Part 1 Items Identified
Schedule B – Part 2 Items Identified
Items Identified Not on Schedule B – Part 1 or Part 2
Total Items Identified (33)+(34)+(35)
28
This proposal is not a statistical plan. It is a financial
reporting plan. It measures financial outcomes only, it does
not collect the data necessary to understand the activity that
occurs at the policy level.
Example: Pitchers versus all other baseball players.
29
State
Policies in Sample
Incidents in Schedule B
Colorado
83
888
Florida
43
248
Louisiana
114
585
North Carolina
270
3,323
All Samples
510
5,044
Given the retrospective coverage in a Title insurance policy, loss
adjustment expense is expended PRIOR to policy issuance. These
efforts resolve matters that would manifest themselves
subsequent to policy issuance.
Financial reporting requirements are based upon P&C policies,
which are prospective. This reporting overstates the Title
expense ratio and understates the Title loss adjustment expense
ratio.
Unless and until the value proposition of Title insurance –
curative efforts, mitigation, analysis, etc. is captured and
reported to regulators, the failure to communicate will continue.