Big Profits in Title Insurance

The stock market is closed today. I hope you’re enjoying another nice long weekend. I noticed this story in the Journal about the title insurance industry. Not too long ago, I had no idea what title insurance was. Now that I follow the industry, I have a hard time believing that everyone doesn’t know about it. I won’t call it a “scam,” but it’s hard to imagine this is not only legal, but lenders make title insurance mandatory.

Title insurance protects homeowners against competing claims for their property. Here’s an interesting historical tidbit for you: Title insurance played an important role in the history of our two greatest presidents. In the 1750’s, Lord Fairfax, the only peer living in North America asked a young man named George Washington (a distant relative) to survey some of his land in the western part of Virginia. By “some land,” I mean half the darn state. Fairfax owned some five million acres. Earlier, the Virginia House of Burgesses tried to do what governments like to do, claim some of his land for itself.

About 60 years later, and not that far away, a Virginia-born farmer named Thomas Lincoln bought a small farm in Kentucky. At this time, this was frontier country. He built a log cabin there and soon, he and his wife had a son. Then along came a man with a competing claim to the farm and the court ruled against the Lincoln family. They had to move and the legal costs were a great hardship to the young family. They were able to lease another farm and soon, the same things happened again.

Thomas Lincoln was fed up with Kentucky and moved to Indiana which had recently been surveyed by the Federal government, so land claims were more secure. Or at least, they were supposed to be more secure. Shortly after the family got in Indiana, Thomas’ wife Sarah died. The whole episode left a great impression on Abraham Lincoln and it may have led him to study surveying and the law.

America has been very fortunate to have avoided the ugly land claims problems of the Old World, and that’s were title insurance comes in. I believe that title insurance is required by law in most states. So you have a product that few people know about, no one even thinks about, the prices vary greatly and I can’t imagine there are too many claims. The profits are enormous and the risk is low, so sign me up! Well, the Journal notes that the industry is coming under some criticism:

Critics say that the problem with the business is that often consumers don’t take note of the fact that they need the coverage until they sit down at the closing.

They say homebuyers are often steered to insurers by real-estate agents, homebuilders, lenders or others who don’t ultimately pick up the tab.
In addition, regulators and consumer advocates also note that title-insurance underwriters face relatively little risk. For example, over the past 10 years title insurers have spent an average of under 5% of operating revenue on insured losses, according to the A.M. Best/American Land Title Association report. By contrast, property/casualty insurers spent roughly 80% of earned premiums, the report says.

Industry officials and some outside analysts, however, argue that the two industries are different. Title insurers, for instance, spend a lot of their money up front on researching titles — spending that isn’t reflected in the loss figures. “It’s a multimillion-dollar investment,” says Lorri Lee Ragan, an association spokeswoman. “It’s not like a Google search.”

In addition, unlike auto, life, or property/casualty insurers, which collect premiums on an ongoing basis, for example, title insurers get paid only once, when they issue a policy, but need to have reserves on hand to pay claims that may not be filed for years.

To give you an example of how profitable some title insurers are, here’s a long-term graph of Fidelity National Financial (FNF, the black line) compared with ExxonMobil (XOM, the gold line). Now ask yourself, when was the last time you heard anyone complain about Big Title?

Posted by Eddy Elfenbein on January 2nd, 2006 at 12:42 pm

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