The perception of title insurance as being uniquely American with very little practical use elsewhere is gradually being dispelled. Title insurance is part of the constantly transforming process of conveying interests in real property. It should be approached throughout Europe as a welcome gust of fresh air breathing life into sometimes-antiquated systems of land title registration in need of periodic updating.
Most forms of title insurance presently marketed in Europe provide coverage against unknown preexisting defects. However, many title insurers in Europe are to be distinguished from their American counterparts in that they take more of an actuarial view rather than the traditional risk elimination view. The character of title insurance has evolved as it has matured over recent years in order to meet the needs of the market.
History of Title Insurance in Europe
There have been a number of attempts by U.S. title insurers to establish themselves in the United Kingdom. Among the first to do so was Stewart Title Insurance Company in 1968, with the effort lasting until 1973, when the decision was made that the UK market was not yet ready to accept the direct importation of U.S.-style title insurance. Chicago Title Insurance Company made the next attempt shortly thereafter, through their subsidiary, CTI Dominion Limited. That endeavor continued until 1978, at which time CTI Dominion was acquired by First American Title Insurance Company. In 1993, Stewart Title re-entered the market and is now meeting with success. First American Title Insurance Company (UK) Limited is prominently engaged in designing title insurance products for mortgage lenders in the UK. In 1995, certain syndicates at the Lloyd’s of London market, through their exclusive managing general agent, London & European Title Insurance Services Limited, started underwriting "title insurance" in England, Wales, Scotland and Northern Ireland, for the first time in its 300-year history. Similarly, in 1999, AXA Courtage, part of AXA, the world’s largest insurance group, launched its title insurance products in France. AXA, headquartered in France, has a workforce of 140,000 in 60 countries and assets under management of 780 billion euros. Marsh, the world’s leading insurance broker, launched its title insurance program in Spain in May of 2000. With giants such as Lloyd’s of London, AXA and Marsh entering the European title insurance marketplace, American title insurers should sit up and take notice. There is little question that as the appetite for title insurance in Europe grows, there will be U.S. title insurance companies entering the market, bringing their great experience and state-of-the-art administrative expertise.
Benefits of Title Insurance in Europe Credit Enhancement
The objective of any sale, securitization or structured finance, from the title standpoint, is to complete a transaction under which the vendee’s or investor’s claim to the assets has priority to all others. Title insurance covers that very issue without condition. Title insurance negates the necessity of relying solely upon lawyer’s title reports and ancillary legal opinions. Rating agencies have become more responsive concerning title insurance and its role in the securitization process. It is not yet included among their rating criteria, but it would not be overly speculative to predict that it will be in due course and those lenders with title insured books will have a substantial edge.
Acceleration of the Process
Lawyers, notaries, lenders, mortgage brokers and other intermediaries have discovered that title insurance is a tool which will serve to increase turnover, reduce liability, simplify the process, and provide their clients with a better assurance of title.
There is a growing perception of risk on the part of house purchasers due to continuous adverse publicity about the time-consuming transfer process. The volume of title insured transactions is ever increasing and there will shortly be hundreds of thousands of insured owners throughout the UK and the Continent. The process has already commenced with more and more borrowers receiving their owner’s policies through the forward-thinking lenders. Indeed, many of the providers of title insurance in Europe are already looking toward the consumer as the ultimate beneficiary of title insurance.
The Title Insurance Market in Europe
Title insurance has expanded from the U.S. to England and Wales, from there to Scotland, Northern Ireland and the Republic of Ireland, and now to France and Spain. Homebuilders, estate agents and the public, especially those purchasing properties in other countries, are all target markets for the title insurer.
The UK Market
Title insurance took 20 years to become accepted in the UK market. It is rapidly becoming part of the conveyancing process. The UK had 1.8 million transactions in 1999. With premiums calculated at an average of £115 ($190) per transaction, the UK represents a potential market of £200 million ($330 million) for title insurance.
The French Market
The recovery of the French economy has witnessed a few false starts since the Europe-wide recession of 1991. However, the clearly visible signs of an upturn over the past year and a half are continuing to grow and the economic indicators support a great deal of optimism. Unemployment was reduced from 12.3% to 10.3% and economic growth increased to 3% in 1999. The stock market registered a record gain of 50% in 1999 giving fuel to other sectors of the economy.
Corporate profits are breaking expectations and the real estate market is on the upswing, attracting investment in both commercial and residential properties. There is a resurgence in the residential market due to a build up of demand, increasing incomes, and various governmental incentives. Among such inducements designed to support the residential property markets, are various tax measures to encourage private individuals to purchase their homes. Transfer taxes have been substantially reduced, thus removing a traditional obstacle, the impact of which was to discourage home ownership. The liberalization of the French inheritance laws will lead to a less complicated system and make home ownership a very secure long-term investment.
The increasing desire of French families to own their homes (as opposed to renting), as well as the present economic optimism, have combined to create an atmosphere of aggressive mortgage lending on the part of the traditional lending institutions. Commercial banks and savings institutions are competing to exploit a rising market by offering creative mortgage products together with innovative insurance programs and better services.
The French market is smaller than that of the UK (approximately one million transactions) due to the lower incidence of home ownership, and a cultural gap that is narrowing. Nevertheless, the potential market can exceed £100 million ($165 million.)
The Spanish Market
Spain has emerged from the economic doldrums of the late 1980s and early 1990s. According to the business magazine, Expansion, Spain’s economy is currently experiencing its best moment of the past 10 years. Domestic demand and tourism are fueling the economic rebound and the slump is over. Monetary union will further aid Spain’s economic growth, being one of the founding members of the European currency. Spain is one of the most popular destinations in the world, attracting 51,773,000 tourists in 1999, an interesting statistic when you consider the fact that the entire population of the country is only 40,000,000. The tourist industry in Spain produces some 10% of Spain’s gross domestic product and 1.3 million jobs. The prognosis for a second home property boom in the Sunbelt areas of Spain (the "Costa’s") is already a reality. Northern Europeans are anxious to own holiday homes in Spain, which appeals to a market of 350 million people living within a two-hour airplane journey. Better motorway systems and fast trains make Spain even more accessible than ever before.
Spain’s present economic position provides the perfect climate for the introduction of title insurance. The fall in interest rates has triggered a spending explosion. Increased employment, combined with reduced mortgage rates, has resulted in the resurgence of the construction industry. There is a vast reservoir of borrowers seeking mortgage financing.
Spain is Europe’s strongest and fastest growing economy. Spanish mortgage lenders are securitizing more than ever in order to fund the growth in the construction sector.
The Spanish market is smaller than that of the UK and France, with slightly less than one million transactions in 1999. However, the potential market for title insurance will nevertheless exceed £100 million ($165 million.)
The European Mortgage Federation has been formed to more formally organize the European Union’s mortgage loan industry. Title insurance will play a major role in the standardization of mortgage instruments in the EU. Harmonization is a key word in the vocabulary of the European Mortgage Federation and nothing goes further to simplify and standardize the process of mortgaging single family residences than title insurance.
Owner occupation of residential properties is increasing steadily throughout the EU. The general trend is toward more and more families purchasing their homes as mortgage lending becomes more efficient. National property laws are not yet subject to EU law. Accordingly, mortgage lenders and cross border purchasers alike are apprehensive about unfamiliar legal systems, making title insurance a very desirable product.
The Italian and German markets present massive opportunities to European title insurers. The expansion to the ancillary markets such as the Benelux countries and Portugal will be natural extensions of activities in France and Spain, respectively.
The European Union presents a market of 350 million, exceeding that of the United States in a geographical area less than a third of its size. It is a sophisticated and prosperous market with a growing need for the standardization and simplification that title insurance will bring to real estate transactions. U.S. title insurers should genuinely consider the opportunities presented, as the expertise earned over the past 100 years is an invaluable asset, readily convertible to profitability through expansion into a vast new market.
Fredrick M. Kerr is chairman, London & European Title Insurance Services Limited. He can be reached at fkerr@FTR.com , or by phone in the United Kingdom at 44 118 957 5000.