Posted on Thursday, September 10, 2009
Title insurance is such a weird beast. While health insurers pay claims that equate to 90-plus cents of every dollar of premiums they take in and property and casualty insurers pay out some 65 cents on the dollar, title insurers pay four-tenths of a cent, according to a major study conducted by the California insurance commissioner. Yet title insurers are heavily protected by archaic laws and regulations that make it hard for consumers to see how little they’re getting for their premiums and that deter competition.
As this Wall Street Journal piece notes, there is pressure for things to change. We’ll add another type of pressure to the WSJ’s list, one that undercuts the whole rationale for title insurance. We’re talking about the digitization of records, which will cause severe disruption to many industries in coming years, with title insurance at the top of the list.
Title insurers say they aren’t really insurers. They’re investigators. They say they spend time sifting through old shoeboxes of documents to make sure the title to a house is clean, so painful issues don’t crop up after someone thinks he’s bought a house. In fact, what happens in almost every case is that someone just types an address into a computer and learns that the title is clean. Obviously, it takes some effort and expense to assemble those computer networks, but it takes less and less every year. This is where the digitization of records comes into play.
For years now, just about every housing transaction has been recorded electronically with local or state authorities. While homes that haven’t changed hands in recent years might not be in a computer system somewhere, there are fewer and fewer of those with each passing year. There are also fewer and fewer government computer systems that function as islands. Before long, all relevant government records will be available to anyone with a computer and access to the Internet. That includes not just titles but lawsuits, tax liens and anything else that might keep a title from being declared clean.
There will be so little need for investigation that even title insurers will no longer be able to claim, as they do in the Wall Street Journal piece, that “nobody is getting rich selling title insurance.”
Regulations are so complicated that it will take time to unwind them, in the face of what will surely be massive rear-guard lobbying by title insurers who will talk about all the jobs they’ll have to cut if their lush margins are cut. But the disruption in title insurance is just beginning.
NOTE: Title insurers say they pay four cents on the dollar in claims, not the four-tenths-of-a-cent figure we use, so a bit of explanation is in order. Insurers do their calculation based on the part of the premium they receive, which, according to the California study, is just 10% of what the consumer pays (the agents involved in selling the insurance keep the other 90%). If you look at what the consumer pays vs. what he gets in return, you wind up with our, lower figure. In macro terms, what we’re saying is that consumers receive roughly $40 million in claims based on the $10 billion of title insurance premiums that people pay each year.