Living Economics

Riskless Insurance
Regulatory protection has led to legal price fixing in the title insurance oligopoly at the expense of home buyers.

Title insurance assures home buyers and their lenders that the seller has clear title to the property being sold. Mortgage lenders would not grant loans without such assurance.

But the risk to the insurers is very low. In Florida, for example, only 3 cents on every premium dollar was paid to cover losses. By comparison, property and casualty insurance companies paid out 87 cents on each dollar (St. Petersburg Times).

The cost of title searches has declined substantially because most deed and title information has been digitized by local government. The cost of an online search could be as low as $25. But since title insurance premiums are tied to the housing cost, the soaring house prices in some hot markets have led to exploding title insurance premiums. For one title insurance company, the average charge for title search and insurance has doubled in a decade to $1472 (Forbes). Title insurance cost could be as high as 14% of the closing cost in states with soaring house prices (St. Petersburg Times).

In short, title insurance is an $18 billion oligopolistic industry dominated by 4 major firms whose revenues have grown 4-folds in 10 years (Forbes). In any oligopoly selling homogeneous products, the predictable market outcome is either illegal price fixing or ruinous price cutting. But in the title insurance industry, neither one of these outcomes ensue. Instead, the oligopolistic firms enjoy protection from state regulatory agencies that set prices title companies may charge or rubber-stamp the firms' requested prices (Forbes). In addition, most states prohibit competitive premium rebates among insurers.

If the average cost of a title insurance policy is $1,472 and only $74 of each policy go to pay claims, that leaves a $1,373 spread for overhead and for profit (Forbes). This fat spread can then be used to buy political support from state and federal legislators and fund kickbacks to real estate brokers, lenders and home builders for business referrals. These under-the-table incentives explain the persistent political clout of the industry.

Only one state has managed to free itself from the title-industry stranglehold. Iowa runs its own title insurance program which charges a flat fee of $110 for insurance, plus about $400 in legal fees and other related costs (Washington Post 1/13/2007).

The title insurance companies have also lost some recent court cases in California, New York, and Tennessee where some companies had to rebate customers, pay fines, or roll back premiums (Sunday Oregonian).

References:
  • Washington Post. 1/13/2007. "Title insurance premiums rose with housing boom."
  • Forbes. 11/13/2006. "Inside America's richest insurance racket."
  • St. Petersburg Times. 7/19/2006. "Title insurance games."
  • Sunday Oregonian. 6/25/2006. "Little is free and clear about title insurance."
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