Fitch: Alleged Kickbacks May Have Significant Implications for U.S. Title Insurers
|January 26, 2005|
CHICAGO--(BUSINESS WIRE)--Jan. 26, 2005--Last week's report that the Colorado Department of Insurance may sanction nine title insurance companies for allegedly paying kickbacks to several large homebuilders in exchange for a guarantee of business could have considerable bearing on the U.S. title insurance industry, according to Fitch Ratings.
Fitch is closely monitoring the potential effects on the U.S. title insurance market, especially given the current widespread investigation of fraud and anticompetitive practices in the insurance industry as a whole, which has been spearheaded by the New York Attorney General Eliot Spitzer's probe into the practices of insurance brokers. Fitch understands that other Departments of Insurance are investigating similar matters.
While details of the investigation are limited, Fitch believes Colorado, Washington and California are currently investigating title insurance companies' reinsurance arrangements with settlement producers (i.e. persons that are in a position to influence the selection of a title insurer such as homebuilders) that steer business to a title insurance company. In these reinsurance arrangements, a title insurer cedes a portion of title insurance premiums to a captive reinsurer that is at least partially owned by the settlement producer who is the source of the business.
Fitch believes these inquiries are focused on two primary issues - 1) whether there is any true risk transfer related to the reinsurance agreement or 2) whether the reinsurance premiums paid to captive reinsurers are in excess of the market rate for the risk being assumed.
Under the Real Estate Settlement Procedures Act (RESPA) and most state statutes, it is illegal to pay referral fees to obtain title insurance business. The determination of whether or not a captive title reinsurance program is in compliance with RESPA depends upon several factors including whether payments made to reinsurers are:
Source: Fitch Ratings