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108 Title Insurerance
Scams & Overcharges to Be Probed by Government
Executives of the industry are grilled about their
'captive reinsurance' programs during a hearing in
L.A.
April 5, 2005 / 5tate Insurance
Commissioner John Garamendi on Monday widened his
investigation of the title insurance industry to include
whether companies were overcharging for
policies.
During a daylong hearing in downtown
Los Angeles, Garamendi grilled top title insurance industry
executives about the practice of sharing customer premiums
with home builders, real estate brokers and other
partners.
The title industry calls the
premium-sharing arrangements "captive reinsurance" programs
in which they also share half the risk of future insurance
losses with their partners. Garamendi, however, contends the
arrangements are fronts for illegal kickback schemes in
which the partners are given the premium money in exchange
for steering business to the
insurers.
He has accused two of the biggest title
companies &emdash; Jacksonville, Fla.-based Fidelity
National Financial Inc. and Richmond, Va.-based LandAmerica
Financial Group Inc. &emdash; of being among the worst
offenders.
"They are giving a large portion of
their premium dollars to the captive reinsurance companies,
but the risk is not commensurate with the price," Garamendi
said.
The average title policy in California
runs about $1,400. Lenders require title insurance when
financing a property transaction to guarantee that there are
no other ownership claims on the
property.
On Monday, title executives
acknowledged that only about 6% of title premiums collected
are paid out in claims. Both LandAmerica, which had sales of
$3.5 billion last year, and Fidelity National, which posted
$8.3 billion in sales, testified that their captive
reinsurance businesses represented less than 1% of their
total revenues.
"The risk being transferred is not
illusory," said Frank Willey, Fidelity National's vice
chairman and a former company president. However, during its
2004 fiscal year, Fidelity reported zero losses recovered
from its reinsurers and estimated zero future recoveries on
claims.
Theodore Chandler, chief executive of
LandAmerica, said his company set aside $714 million in
reserves as of Dec. 31 to pay possible future claims but
couldn't say how much of that would probably go toward
captive reinsurance claims.
"Any one claim could be catastrophic,"
he said, adding that home buyers benefit from captive
reinsurance programs because they provide "one-stop
shopping" for property settlement services, particularly for
the buyers of new homes.
Richard Robinson, senior vice president
of William Lyon Homes Inc., said his company formed a
separate reinsurance arm after Fidelity suggested it do so
in 2000. "We agreed to take on 50% of the risk," he said.
Garamendi said the title companies'
willingness to split their premium profits suggested that
policies were too high to begin with and that the programs
had more to do with marketing than insuring
risk.
"Ceding 50% of their premiums indicates
there's a whole lot of fat in the game," he said.
Examining the captive reinsurance issue
"provides a window to look at whether rates may be far
higher than justified," Garamendi said.
Garamendi requested additional
information from the title companies Monday before he could
determine whether the companies violated California
law.
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