What AM Best Says
AM Best: US Title Insurance Premium Saw Sizable Growth in 2020 Despite COVID-19

• Lori Chordas
• December 2021
• 

While the COVID-19 pandemic had a limiting impact on many sectors of the economy, for the title industry it has been nothing short of a boom.

Historically low borrowing rates, a rising housing market, elevated demand and an explosion of loan refinancing activity have spurred substantial growth not seen by title insurers in recent memory, according to the Best's Market Segment Report: Robust Housing Market Drives Historic Title Performance. Kourtnie Beckwith, financial analyst, and Ann Modica, associate director, both of AM Best, discussed the report with AM Best TV.

Following is an edited transcript of the interview.

The housing market has been red-hot. Can it sustain itself at these levels?

Modica: The housing market has been on quite a tear this year, really since the third quarter of last year, as demand for homes far outpaced the supply. This resulted in record pricing appreciation in some areas, but we believe the rate of appreciation is unsustainable over the long-to-medium term, and we expect this to moderate over time.

Related: Best’s Market Segment Report: Robust Housing Market Drives Historic Title Performance

I'm just going to take a little quick look at what caused the pricing appreciation. Housing supply not keeping up with demand really dates back prior to COVID, but the pandemic just really exacerbated it.

Demand for housing increased during the pandemic for a variety of reasons, including the desire to move away from populated areas, the need for more space, as people were working from home, schooling from home, and, obviously, the lower mortgage rates made the cost of borrowing for a home even cheaper.

All these factors added to the existing demand that was out there prior to COVID. During the same time, as demand was increasing, supply was being limited due to lower new construction and people not listing their existing homes.

Looking forward, we believe that housing demand will remain strong, but not at the same pace we've seen in the last year, year and a half. We have seen signs of this moderating as pricing begins to decelerate in some areas, and more inventory becomes available.

Did the pandemic have any impact on title insurers' upfront costs?

Beckwith: Title insurance undoubtedly has heavy upfront costs, which benefits both the policyholder and title insurers. They incur a substantial cost because of personnel expenses, the cost to service, abstractors and attorneys, coupled with the involvement of highly specialized title agents.

However, because of all the mitigation that takes [place] upfront prior to policy issuance, title insurance does experience very low loss ratios. As for your question, during the pandemic, the upfront cost has remained relatively flat, or slightly higher, due to volume, and that's because of premiums.

In general, you could say that title insurance indirectly benefited from the pandemic, as we are in a low interest rate environment, and then home buyers decided to relocate out of some of their major cities.

When the current homeowners looked to refinance, they were able to refinance at lower rates to take advantage of things such as a reduced term, some home projects, renovations that they always wanted to complete, as well as consolidating debt, amongst other things.

With title insurance, the revenues are a little bit higher when it comes to home loan originations, simply because they're based off of the home value, compared to refinancing, which usually there's some equity in those loans, and the loans have a lower amount.

Are there any areas of concern for the housing market? For example, are first-time home buyers being left behind?

Modica: Affordability is definitely a concern, particularly for the first-home buyers, and this is being driven by the lack of inventory and a drive—the run-up in prices. While builders have started to increase production to meet demand, we still have supply chain bottlenecks, goods shortages and increasing construction costs.

That has really limited the pace of new construction growth. Goods like lumber have moderated and returned to pre-pandemic levels, but we've seen other pricing pressures for other materials persist, particularly for labor. There are a lot of construction jobs currently open.

I'll just mention one other concern, and that's the expected increase in mortgage rates will also affect home affordability. The Federal Reserve has started to signal that they will start to pull back on some of their extraordinary monetary support that it implemented last year.

In March of 2020, they cut the fed funds rate by 150 basis points, and they also started buying about $40 billion a month of mortgage-backed securities in order to provide liquidity, and this also helps keep mortgage rates low.

Many believe that the Fed will start to taper purchases, probably sometime in the beginning of next year, and then after that, they'll start to gradually increase the fed funds rate if and when the economy continues to improve, and these actions will drive mortgage rates higher.

Related: Booming Housing Market Plus Low Interest Rates Boost Reinsurance and Private Mortgage Insurance

The title insurance market is noticeably top-heavy. Is there room for new entrants or smaller players?

Beckwith: As you know, title insurance is, in fact, top-heavy. We are used to the coined term, the Big Four, which include Fidelity National, First American, Old Republic and Stewart.

They've dominated the industry since 2011, but we've seen that they lost some of that market share to some of the smaller players and new entrants over that same time. There are customers who choose to do business with the regional carriers, and so that's how some of the smaller title insurers and new entrants are able to gain some of that momentum.

Also, in the past couple of years, we've seen the entry of Doma, which was founded in 2016. Doma specializes in digitizing and streamlining the closing process. Actually, in March of 2021, they did enter a definitive business competition agreement with Capitol Investment Corp. to bring intelligence technology platform to the public for residential real estate.

AM Best believes that the entrance of smaller regional or even insurtechs like Doma still need some time to be seen in terms of their acceptability and their effectiveness, and we intend to follow this closely and report back later.