Rate Regulation

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September/October 2000 - Volume 79, Number 5

The following is excerpted from the ALTA®/A.M. Best Report, "Title Insurance Report and Industry Statistics."

Like the rates for other forms of insurance, rates for title insurance are usually regulated by the state governments to ensure that premiums are not excessive, inadequate or unfairly discriminatory to the public. States have different methods of regulating title insurance rates. The types of rate regulation used are:

1. Promulgation - A state regulatory body sets the rates.
   
2. Prior Approval - Insurers propose rates which must be formally reviewed and explicitly approved or deemed approved by the regulatory body before they can be charged.
   
3. File and Use - Insurers set rates, but they cannot be charged until the regulatory body has been notified and allowed time for review and action if necessary. In some prior approval states, almost the same result is achieved through a so-called deemer provision. Under a deemer, rates proposed by insurers are deemed approved if the regulatory body takes no action to disprove a filing within a specified time and the filer notifies he state that the rates are being deemed approved.
   
4. Use and File - Insurers set rates which can be charged immediately, as long as the new rate schedule is filed with the regulatory body.
   
5. No Direct Rate Regulation - Insurers set rates which can be changed at an insurers' discretion. Even in this apparent unregulated situation, a regulatory body is still charged with overseeing the title insurance industry and can question the propriety of a rate that appears to be unfairly discriminatory or otherwise violates statutory standards.

Exhibit 1A provides a state-by-state outline of rate filing statutes.

Title Rates

Title insurance premium rates are largely determined by operating and acquisition cost factors, as compared to property/casualty rates that are based on the actuarial determination of expected losses. The risk of title loss is a function of many factors, which may vary considerably from jurisdiction to jurisdiction and transaction to transaction. Rates also vary considerably from state to state.

Rate Adequacy and Stability

Title insurance premium rates are based on five considerations:

1. the cost of maintaining current title information on property local to that operation, i.e., title plant;
   
2. the cost of searching and examin-ing title to subject properties;
   
3. the cost to resolve or clear defects to title;
   
4. the claims costs covering title defects; and
   
5. the allowance for a reasonable profit.

Loss Characteristics Between Companies

Title insurance loss experience varies considerably among individual companies based on a wide array of factors, including:

1. Experience and technical competency of both a company's agents and title underwriters.
   
2. Quality and quantity of title documentation and evidence (both public and private) underlying the search and examination process.
   
3. Regional differences in title insurance customs and practices, underlying title insurance risks, the mix of residential sale, residential refinance, and commercial business, and defalcation risks.
   
4. Adequacy and effectiveness of a company's underwriting controls and agency management systems.
   
5. Differences in the proportion of a company's agency vs. direct book of business.
   
6. Differences in the proportion of a company's commercial vs. residential book of business.
   
7. Differences in company claim ad- ministration processes in areas of claim recognition, evaluation, timing of settlement and recoupment.

Title companies compete with nearly identical products, based on title policy forms developed by either the American Land Title Association® or the Jurisdictional (Statutory) Land Title Association. As a result, the areas for competition have shifted to price and service.