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Comments of Joseph L. Petrelli, Demotech, Inc. at the 2010 Ohio Land Title Association Columbus, OH. Joseph L. Petrelli, Demotech, Inc. 614 -761- 8602.
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Comments of Joseph L. Petrelli, Demotech, Inc. at the 2010 Ohio Land Title Association Columbus, OH 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.
What We’ve Got Here is a Failure to Communicate • Title insurance coverage is retrospective, from the policy effective date. • P&C insurance coverage is prospective, from the policy effective date. • 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.
Ohio Revised Code 3953.01 (A) “Title insurance” means insuring, guaranteeing, or indemnifying owners of real property or others interested in real property against loss or damage suffered by reason of liens or encumbrances upon, defect in, or the unmarketability of the title to the real property, or doing any business in substance equivalent to any of the foregoing.
Excerpts of Title Coverage Summary of some covered risks under the American Land Title Association (ALTA) Loan Policy – 2006 edition. • Title being vested other than as stated in Schedule A • Any defect in or lien or encumbrance on the Title. The Covered risk includes but is not limited to insurance against loss from …
Covered Perils A defect in Title caused by: • Forgery • Fraud • Undue influence • Duress • Incompetency • Incapacity • Impersonation
Covered Perils (cont.) • Failure to authorize a transfer or conveyance • Improperly created, executed, witnessed, sealed, acknowledged, notarized or delivered document(s) • Documents executed under falsified, expired or otherwise invalid power(s) of attorney • Documents not properly filed, recorded or indexed in the Public Records • Defective judicial or administrative proceeding
Covered Perils (cont.) • Lien of real estate taxes or assessments imposed on the Title by a government authority due or payable, but unpaid. • Encroachment, encumbrance, violation, variance or adverse circumstance affecting the Title that would be disclosed by an accurate and complete land survey • Unmarketable Title • No right of access to and from the land
Typical Language in a Title Insurance Policy States: 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.
Typical Language in a P&C Insurance Policy States: 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.
Date of Policy Date of Policy P & C is Prospective Title is Retrospective Incident must have occurred prior to policy date to be considered covered Incident must occur within policy period to be considered covered
Implement Consistent Standards 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.”
P&C Defense and Cost Containment(Previously Allocated) • Surveillance expense • Litigation management expense • Fees or salaries for appraisers • Fees or salaries for private investigators • Fees or Salaries for fraud investigators • Attorney fees incurred owing to a duty to defend, even when other coverage does not exist • Cost on engaging experts
P&C Adjusting and Other(Previously Unallocated) • Fees of adjustors and settling agents • Attorneys fees incurred in the determination of coverage, including litigation between the insurer and policy-holder • Fees or salaries for appraisers, private investigators, hearing representatives, fraud investigators in the capacity of an adjustor
Loss Adjustment Expense • 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!
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 cross-hairs.
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.
Conclusion Given the retrospective coverage in a Title insurance policy, loss adjustment expense is expended priorto 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.
