Joseph L. Petrelli, ACAS, MAAA, FCA President, Demotech, Inc. Arkansas Land Title Association

Title Insurance is Different …Unfortunately the Financial Reporting & Statistical Plans in Place, or Contemplated, Do Not Capture the Differences Joseph L. Petrelli, ACAS, MAAA, FCA President, Demotech, Inc. Arkansas Land Title Association

Introduction In 2006 Demotech, Inc. published What We Have Here is A Failure to Communicate. Our white paper described the critical coverage and loss adjustment expense differences distinguishing Property and Casualty insurance from Title insurance. Furthermore, Demotech, Inc. described how financial reporting requirements failed to capture and summarize those differences. This presentation provides additional insight and detail on the failing of current, or proposed, statistical and financial plans applicable to Title insurance. The opinion and perspective presented are those of Demotech, Inc. and do not necessarily represent the opinions or perspectives of our clients, or the Title underwriters we review and rate.

A Title Professional’s Introduction to: The National Association of Insurance Commissioners’ Title Agent Statistical Data Plan

INTRODUCTION The National Association of Insurance Commissioners (NAIC) has adopted the Title Agent Statistical Data Plan (“NAIC Plan”) to collect financial data from title agents nationwide. The NAIC has recommended that each state implement this NAIC Plan to assist regulators in the oversight of the title insurance industry. Part I of this section of the presentation tracks the origins and development of the NAIC Plan, and explores the purpose of the NAIC Plan. Part II provides details on the actual data reporting requirements, including a line by line analysis of the NAIC Plan and overview of the NAIC’s recommended standards for implementation. In Part III, we summarize the NAIC Plan’s Implementation guidelines. NAIC, Title Agent Statistical Data Plan Implementation Guideline, 2011. (“Implementation Guideline”)

PART I - ORIGINS, DEVELOPMENT, and PURPOSE of the NAIC PLAN Review of the NAIC and the Regulation of Insurance ORIGINS of the Title Insurance AGENT Statistical Report DEVELOPMENT of the NAIC PLAN PURPOSE of the NAIC PLAN

REVIEW of the NAIC and the REGULATION of INSURANCE • Insurance industry is regulated by the states • National Association of Insurance Commissioners is a collective body • Standard-setting, regulatory support organization • Created and governed by the chief insurance regulators of the 50 states • Started in 1871 to coordinate the regulation of insurers operating in multiple states • The NAIC establishes standards and best-practices for the insurance industry’s regulators as well as insurers and other regulated entities http://www.naic.org/index-about.htm

ORIGINS of the Title Insurance AGENT Statistical Report (From GAO Report to NAIC Working Group) • 2007 Report from U.S. Government Accountability Office (GAO) to U.S. House Committee on Financial Services: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers. (GAO-07-401)1 • Highlights from report: • Large insurers use local/regional title agents to conduct their business • GAO thought understanding relationship between costs and amounts consumers pay could help regulators improve their ability to protect consumers • GAO recommended that state regulators take action to: • Improve consumers’ ability to shop for title insurance; AND • Improve oversight of title agents • GAO recommended that regulators collect data on title agents’ operations • NAIC listened to GAO recommendations and formed a task force to evaluate the viability of a nationwide data call2

DEVELOPMENT of the NAIC PLAN(From Title Insurance Issues Working Group to NAIC Adoption of NAIC Plan) • Title Insurance Issues Working Group (TIIWG)/Title Insurance Task Force • Sub-group of the P&C Committee of the NAIC • Mission was to study issues related to title insurers and title insurance producers • 2008--TIIWG decided a NAIC Plan for title insurers should attempt to measure, state by state: • Profitability of title industry • Competitiveness of title industry • Reasonableness of rates and charges NAIC, Title Insurance (C) Task Force. Conference Call, Sept. 1, 2011. Project History: Title Agent Statistical Data Plan Implementation Guideline. (“Project History”)

DEVELOPMENT of the NAIC PLAN(From Title Insurance Issues Working Group to NAIC Adoption of NAIC Plan) (cont.) • 2009—P&C Committee charged TIIWG with completing study on the ability to develop and implement a system to collect premium and expense data • TIIWG concluded that it could assist states in developing a data call plan • TIIWG became the Title Insurance Task Force and appointed the Title Statistical Plan Working Group to develop a nationwide statistical plan NAIC, Title Insurance (C) Task Force. Conference Call, Sept. 1, 2011. Project History: Title Agent Statistical Data Plan Implementation Guideline. (“Project History”)

DEVELOPMENT of the NAIC PLAN(From Title Insurance Issues Working Group to NAIC Adoption of NAIC Plan) (cont.) • Title Statistical Plan Working Group (TSPWG) • Appointed by the Title Insurance Task Force to develop a nationwide statistical plan and implementation strategies to assist states in collecting data3 • TSPWG, with input from The American Land Title Association (ALTA), insurers, title agents, and software vendors, developed Title Insurance Agent Statistical Report (“NAIC Plan”). • NAIC Plan was fully adopted by NAIC in Fall 20104 • TSPWG drafted guideline to assist states in implementing the NAIC Plan • Title Agent Statistical Data Plan Implementation Guideline was adopted by NAIC in Fall 2011.5

PURPOSE of the NAIC PLAN • “The purpose of the [NAIC plan] is to give information that is more useful to state regulators about the business of title insurance at the agency level.”* • NAIC recognized that in most jurisdictions performance of the title insurance business is based on the title agent, not the title underwriter • Annual financial report submitted by title underwriters includes information regarding premiums and losses, but does not include information about the title insurance business that is experienced only on the agent level • Regulators lack valuable information and have an incomplete picture of the title insurance business • NAIC proposes that jurisdictions need to obtain data from agents • The purpose of the NAIC’s NAIC Plan is to collect information from title agents, particularly regarding their actual operating costs and their losses NAIC, Title Agent Statistical Data Plan Implementation Guideline, 2011. (“Implementation Guideline”)

PART II -TITLE AGENT STATISTICAL DATA PLANA.K.A. “NAIC PLAN” NAIC PLAN - OVERVIEW NAIC PLAN - DETAILS TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE GOING FORWARD - WHAT WILL THE STATES DO?

NAIC PLAN—OVERVIEW • NAIC undertook to design statistical data reporting plan to collect data in five categories: • General information and agency information • Risk assumption • Income • Expenses • Loss and loss mitigation • Goal of plan is to collect enough data to help regulators while not overburdening title agents • Instructions for: • Single State Agent • Multi-State Agent • Attorney Agent • Underwriter Direct

PART II - TITLE AGENT STATISTICAL DATA PLAN A.K.A. “NAIC PLAN” NAIC PLAN - OVERVIEW NAIC PLAN - DETAILS TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE GOING FORWARD - WHAT WILL THE STATES DO?

NAIC PLAN - DETAILS SAMPLE A full copy of the Title Agent Statistical Stat Plan can be found at: www.naic.org/documents/committees_c_title_stat_plan_final.xls

NAIC PLAN - DETAILS SAMPLE

NAIC PLAN – DETAILS - ACTUAL

NAIC PLAN - DETAILS

NAIC PLAN - DETAILS Demotech’s note: Loss mitigation efforts are not captured. We suggested that, at a minimum, Schedule A and B counts be reported.

PART III -TITLE AGENT STATISTICAL DATA PLANA.K.A. “NAIC PLAN” NAIC PLAN - OVERVIEW NAIC PLAN - DETAILS TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE GOING FORWARD - WHAT WILL THE STATES DO?

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE • Title Statistical Plan Working Group issued an Implementation Guideline for the new Statistical Data Plan to assist state regulators with implementing the NAIC Plan • Part A. Introduction • Outlines the background and purpose of the NAIC Plan and provides general information regarding the NAIC Plan

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE • Part B. Mechanism for Reporting and Collection of Data/Implementation • Data required has not been previously reported, but should be readily available to title agents • Task Force recommends that regulators provide as much notice as possible before implementing the NAIC Plan so agents may adapt their systems to collect the required data • Task Force recommends annual reporting date of June 1 for previous year’s data • Recommend that regulators establish web-based reporting system

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE • Part C. Confidentiality of Data • Task Force recommends that regulators keep individual responses on the NAIC Plan confidential, but regulators should be allowed to share/publish aggregate data • Part D. Uses of Data • Regulators should be careful if they intend to use NAIC Plan to set rates or analyze justifications of rates and fees because NAIC Plan does not capture the entire agent experience • Task Force recognizes that regulators may use data to set rates

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) • Other uses of the data include: • Fulfillment of GAO recommendations of increased title agent data collection • Comparison of relationships of costs to title agents and prices consumers pay • Quantitative analysis of differences between title insurance and other lines of insurance • Comparison of FTEs in agencies vs. total licensees in a jurisdiction • Agent premium experience • Market share analysis • Marketing expense ratios (compared to market share) • Premium vs. agency claims loss experience • Agent experience by locality • Development of market conduct base line market analyses

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) • Part E. Insurance Department Outreach Efforts • Task force recommends that regulators engage in outreach and training initiatives • Suggest contacting state and national title associations, title insurance data collection and consulting firms, title insurance underwriters’ state offices, state departments of insurance, and NAIC

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) • Part F. Suggested Statute Language • Title Agent Statistical Data Plan. • Every title agency doing business in this state, on or before the last day of May in each year, shall submit to the commissioner a report, signed and certified by an owner, officer, partner, or director of the agency, of the specific information listed in the NAIC Title Insurance Agent Statistical Data Plan. • Information relating to the individual agencies filed with the commissioner under subsection (1) shall be kept confidential and not subject to public disclosure. However, nothing in this subsection (2) shall prohibit the commissioner from publishing data collected in an aggregate form, so as not to identify individual agencies’ data, or from sharing particular agency data with other state, federal and international regulatory agencies, with the National Association of Insurance Commissioners, its affiliates or subsidiaries, and with state, federal, and international law enforcement authorities, provided that the recipient agrees to maintain the confidentiality and privileged status of the information.

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) • Part F. Suggested Statute Language • The commissioner may establish rules, including rules providing statistical plans, for use by all title insurers and title insurance agents in the collection and reporting of demographic, revenue, expense and loss experience data in such form and detail as is necessary to aid him or her in the evaluation of the title insurance industry at the agency level. Drafting Note: States that require the data to be submitted electronically should establish a method of electronic signature verification that is acceptable to the commissioner.

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) • Part G. Suggested Regulation on Reporting Requirements Drafting note: This is not a model regulation, but a suggested regulation/best practice for any necessary rules that may need to be promulgated for the implementation of the NAIC plan. When drafting regulations, take into account local statutes, practices, and customs and modify this regulation accordingly. Section 1. Statement of Purpose This regulation is intended to provide standards and direction for the collection and reporting of title agent data in accordance with the NAIC’s Title Agent Statistical Data Plan. The regulation specifies the data required, due dates and time periods for collection and submission of data, methods of submission, and addresses the confidentiality of the data submitted.

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) Section 2. Statutory Authority This regulation is issued based upon the authority granted the commissioner under (cite any enabling legislation and state law corresponding to market analysis, market regulation, and/or title insurance regulation). Section 3. Applicability and Scope Under this regulation, all operating title insurance agencies and underwriter direct operations are required to provide yearly reports of their policy issuance, business income and expense, and loss experience (excluding losses forwarded to or paid by an underwriter). Agencies include independent title agencies, affiliated business arrangement (AfBA) title agencies, attorney firms/title agencies, and underwriter direct operations. Drafting note: Types of entities may vary by state

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) Section 4. Definitions • Affiliated Business Arrangement (AfBA) – an arrangement in which a settlement producer, such as a real estate broker, developer, mortgage loan originator, or bank, or any other individual or entity that is in a position, directly or indirectly, to refer settlement business to a title entity, also maintains a direct or beneficial ownership interest in that title entity. • Affiliated title agency – a title agency that is owned, either wholly or in part, by a title insurance company/underwriter, but does not operate as an underwriter direct agency. • Attorney firm/title agency – a title agency that is owned and operated by an attorney or law firm. • Independent title agency – a title agency that is not part of an ownership arrangement with a real estate settlement producer, or with a title insurance company/underwriter.

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) Section 4. Definitions (cont.) Drafting note: Individual states may have different definitions for some of the above items, or may have more or fewer definitions to include. In addition, definitions under Real Estate Settlement Procedures Act (RESPA) may vary from those listed above. States should update, add or delete definitions, as well as add relevant statutory citations as necessary. Section 5. Data Required Incorporate reference to NAIC plan here, rather than including the actual plan (to accommodate for future amendments to plan). Section 6. Due Dates/Time Periods for Collection All reporting entities are required to submit the data referenced in Section 5 of this regulation on or before May 30 for the immediately preceding reporting period.

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) Section 7. Method of Submission All reporting entities shall submit the data in a manner prescribed by the commissioner. Drafting note: States should develop a method for collecting data electronically, either through a database in which entities can log in to report or through a dedicated email address, as well as methods of communicating requirements and any changes to the industry. Such method should be noted in Section 7. Section 8. Confidentiality and Sharing Information filed with the commissioner relating to the experience of a particular agent shall be kept confidential unless the commissioner finds it in the public interest to disclose the information required of title insurers or title insurance agents under this section.

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) Section 8. Confidentiality and Sharing (cont.) In order to assist in the performance of the commissioner’s duties under this chapter, the commission may share data and information submitted by title insurance entities, including agencies, insurer direct operations, and title agent attorney firms, pursuant to Title Agent Statistical Plan data calls and collections, with other state, federal, and international regulatory agencies, with the National Association of Insurance Commissioners, its affiliates or subsidiaries, and with state, federal, and international law enforcement authorities, provided that the recipient agrees to maintain the confidentiality and privileged status of the information. Additionally, nothing contained herein shall prohibit the commissioner from sharing or publishing data in an aggregate form with the above parties or any other stakeholder. Drafting note: States should ensure that the language that they use does not, nor can be construed as attempting to, limit the sharing or publication of aggregated data, since such publication may in fact make important disclosures regarding the experience of title agents in a particular geographic area or business demographic (i.e. by county, state or by agency type.) Furthermore, states should contemplate whether or not they intend to publish aggregated data and the extent to which they are prepared to be required to publish or just may publish, etc.

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) Section 9. Enforcement The commissioner may require that the information provided under this section be verified by oath of the insurer’s or agent’s president or vice president or secretary, as applicable. The commissioner may further require that the information required under this section be subject to an audit conducted by the commissioner. The commissioner shall have the authority to establish a minimum threshold level at which an audit would be required. Noncompliance with this regulation may result, after proper notice and hearing, in the imposition of any of the sanctions available in the (insert state) statutes pertaining to the business of insurance or other laws which include the imposition of fines, issuance of cease and desist orders, and/or suspensions or revocation of license. Among others, the penalties provided for in (cite appropriate state laws concerning failure to respond, unfair business practices, etc.) may be applied.

TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE (cont.) Section 10. Severability If any of the provisions of this regulation shall be held invalid or unenforceable, this regulation shall be construed as if not containing such provisions and the validity, legality, and enforceability of the remaining provisions shall not be affected or impaired in any way. Section 11. Effective Date This regulation is effective on [insert date] and applies to all transactions entered into after the effective date.

PART IV -TITLE AGENT STATISTICAL DATA PLANA.K.A. “NAIC PLAN” NAIC PLAN - OVERVIEW NAIC PLAN - DETAILS TITLE AGENT STATISTICAL DATA PLAN IMPLEMENTATION GUIDELINE GOING FORWARD - WHAT WILL THE STATES DO?

GOING FORWARD …WHAT WILL THE STATES DO? • New Jersey is moving to adopt a statistical plan* • Interest for data collection in Florida* • New York and Pennsylvania issued their own data calls in early 2010 (Jeremy Yohe, Creation of a National Title Agent Data Call, Title News, Vol. 89, No. 6, June 2010, at 8.) • NAIC survey indicated that only 11 states, and Puerto Rico, intended to participate in the NAIC Plan:* • Alaska • Arizona • Colorado • Florida • Michigan • Minnesota • New Hampshire • New Jersey • Nevada • Puerto Rico • Tennessee • Washington *ALTA Advocacy Update (Dec. 28, 2011) reported

What We’ve Got Here is a Failure to CommunicateA summary of the white paper written in 2006It’s 2012 and we still aren’t communicating!

What We’ve Got Here is a Failure to Communicate Title insurance coverage is retrospective from the policy’s effective date and remains in force throughout the term of a loan or the ownership of real property. Policies are issued once the Title insurance professional has addressed issues that adversely impact marketability of the title have been identified, addressed or resolved prior to policy issuance. In contrast, P&C insurance coverage is prospective, identifying a finite future period with a definitive expiration date, as the coverage period for covered incidents that arise during the term of the policy. Events occurring prior to the effective date are excluded as are those that occur subsequent to the expiration date.

What We’ve Got Here is a Failure to Communicate The coverage timeframe differential in conjunction with a misunderstanding of the nature of Title insurance curative activities are ignored by existing and proposed reporting requirements. As a result, the value proposition of Title insurance can not be properly presented, captured or understood. The target loss and loss adjustment expense ratio for Title insurance is zero.

Title Insurance Policy Coverage Subject to the exclusions from coverage, the exceptions from coverage contained in Schedule B and the conditions and stipulations, the Title Underwriter, as of the effective date, insures against loss or damage…

P&C Insurance Policy Coverage In Consideration of the Provisions and Stipulations herein, Property and Casualty Insurance Company, for the term of Effective Date at 12:01 a.m. to Expiration Date at 12:01 a.m., does insure…

Effective Date of Policy Effective Date of Policy Property & Casualty Prospective Title Retrospective Incident must have occurred prior to policy period and remain unresolved prior to policy issuance to be considered Incident must occur within policy period to be considered

Joseph L. Petrelli, ACAS, MAAA, FCA President, Demotech, Inc. Arkansas Land Title Association