Competition is driving up prices. No, that’s not a typo, and, no, this is not a belated April Fool’s column.

Executive Summary

Opinion: A $1.2 billion deal proposed to tie up two large title insurers—Fidelity National Financial and Stewart Information Services—could exacerbate extreme concentration of the title insurance market, according to consumer advocate J. Robert Hunter, who reached out to Carrier Management to publish an opinion piece in the wake of the announced deal. The resulting company would control over 45 percent of the market, according to Hunter.

But Hunter isn’t just focused on market share—and he’s not just worried about title insurance. Title insurance is one of several specialty lines where “reverse competition” can take place, rewarding third parties for steering buyers to the insurer.

Here, he reviews some of the key points he’s made at public hearings before insurance regulators—most recently in support of New York regulations to curb title insurer spending on “improper inducements” defined by the New York State Department of Financial Services.

In the second part of this two-part Carrier Management article, Hunter proposes some fixes: “Steps Regulators and Legislators Should Take to End Reverse Competition Abuses.”

As a result of a serious insurance regulatory oversight problem in most states, certain insurance products are vastly overpriced due to one particular phenomenon: competition among insurance companies that sell title, credit, lender-placed and a few other insurance coverages.

The problem with these particular lines of insurance is that the markets are plagued by a bastardized form of competition in which the prospective insurance policyholders are not the target of company marketing or the beneficiaries of efforts to compete. Rather, these insurers compete for the attention of intermediaries who can steer families, who ultimately pay the premium, into the company’s portfolio of insureds.

This phenomenon is aptly called “reverse competition.”

Reverse competition is a feature of insurance transactions in which the buyer of the policy is not shopping for insurance but buying a different, often costly item such as a home or a car, and insurance is required or suggested as part of that purchase process. At that point, a third party, such as a real estate broker or a car dealer, is in a position to steer the customer to an insurer. This third party can be influenced in making the selection of an insurer by financial inducements or kickbacks from the selected insurer.

Inducements can take many forms—legal and illegal—including commissions, underpriced services such as loan tracking, captive reinsurance deals, gifts, cash, trips, entertainment and other arrangements. The competition in this market focuses on rewarding the third party for steering the buyer to the insurer paying the richest kickbacks rather than the lowest price or best customer value. Since this competition for the intermediary increases the price of the insurance product—to account for the cost of the inducements—the competition is the reverse of normal competition, where the ultimate buyer is the person who selects the insurer with a focus on lowering, not raising the premium charged.

Which Lines of Insurance Suffer From Reverse Competition Abuses?

The lines of insurance with the most acute reverse competition abuses, include:

1. Credit insurance or debt cancellation insurance, which is sold in conjunction with the purchase of a car, a home, furniture or some other product requiring a loan to fund.

Credit insurance can cover death (credit life insurance or mortgage life insurance when it is covering a home), illness or injury (credit accident and health insurance and credit disability insurance), loss of job (credit involuntary unemployment insurance), and family leave (credit family leave insurance).

These policies usually pay very low benefits—in some cases, less than 40 cents of each premium dollar—though the payout ratio is much higher in some states that have set minimum payout ratios to premium, as well as for most policies sold by credit unions. (A detailed discussion of credit insurance can be found in a 2001 joint report by the Consumer Federation of America and the Center for Economic Justice, two consumer interest organizations:

These lines of insurance are typically sold to consumers by the people who are selling them the affiliated product or service, such as the car dealer or the furniture store owner. These sellers typically receive significant commissions as an inducement for strong sales efforts.

2. Title insurance, which is sold at the closing of a home and is in place to defend and compensate buyers and lenders in case of challenges to the title ownership.

There are two types of policies—a lender’s policy and an owner’s policy—both of which are usually purchased by the home buyer, not the lender.

Studies have consistently revealed how inefficiencies in the title insurance market have harmed consumers through excessive premium prices, highlighted by the fact that title insurance has a shockingly low loss ratio of 5 percent nationally. (Editor’s Note: A 2008 NAIC report on the state of the title insurance market reported state loss ratios ranging from 4 to 18 for five large states; a 2012 NAIC report showed a loss ratio of roughly 12 and an expense ratio of nearly 101 for all title insurers. The author calculated state loss ratios ranging from 0.6 to 19.4, with a countrywide average of 6.6 for 2012, documented in his public testimony before the New York State Department of Financial Services on Dec. 10, 2013 )

“The competition in this market focuses on rewarding the third party for steering the buyer to the insurer paying the richest kickbacks rather than the lowest price or best customer value.”

J. Robert Hunter

Title insurers market their products to real estate professionals—real estate agents, mortgage lenders, mortgage brokers, attorneys, homebuilders—who can often steer consumers to a particular title agent or title insurer, which, in turn, often richly compensates the professional for the referral. In this relationship, title agents and title insurers often compete for the business of real estate professionals by offering them higher compensation and other considerations, driving up prices. The grotesque lavishness of title industry efforts to woo real estate professionals has begun to place a spotlight on reverse competition in recent years. (Editor’s Note: Maria T. Vullo, Superintendent of the New York State Department of Financial Services, discussed a variety of entertainment expenses in testimony for a public hearing on Jan. 12, 2018. The alleged excesses are also described in the Jan. 29, 2018 New York Times article titled “New York’s Hidden Home Buyer Closing Costs: Luxury Boxes and Mint Mojitos,” by Shane Goldmacher)

3. Lender-Placed Insurance (also known as “creditor-placed” or “force-placed” insurance), which is an insurance policy placed by a bank or mortgage servicer on a home or car when the homeowner’s (or car owner’s) property insurance may have lapsed or where the bank deems their coverage insufficient to protect its loan’s collateral.

All mortgages and car loans require borrowers to maintain adequate coverage on the property that is the subject of a loan. Borrowers can fail to maintain the required coverage for a variety of reasons—cancellation, a withdrawal by their existing insurer, lack of funds or even just simple oversight, such as a missed payment. However, if the policy lapses or is canceled and the borrower does not secure a replacement policy, most mortgages and car loans allow the lender to purchase insurance for the home or car and “force-place” it. These standard provisions allow the lender to protect its financial interest in the property (its collateral) if a calamity occurs, which makes good sense. Where this approach goes off the tracks, however, is that the insurance company selling this back-up policy is chosen by the lender or mortgage servicer, not the borrower (homeowner).

The lenders typically choose the insurer with the best incentives or kickbacks for the lender. These kickbacks come in the form of commissions to lender-owned insurance agents (who do no work at all to secure the business), captive reinsurance arrangements, below-cost or free tracking of loans, ownership deals, or other ways to funnel money to the lender. (In Aug. 9, 2012 testimony before the NAIC, we provided more details of lender-place insurance.)

Premiums for force-placed insurance usually are at least two times as high as the policy being replaced. Actuarial studies reveal that the difference in cost is almost entirely kickback-driven. Loss ratios for force-placed insurance are extremely low compared to the policies they have replaced, often well below 40 percent.

4. Travel insurance. Travel agents often try to sell travel insurance when a consumer is making travel plans. To incentivize the agent, they receive a hefty commission on this sale, which often drives the payout ratios well below 50 percent of premium.

5. Insurance, such as collision damage waivers from car rental companies. These high-priced policies— sometimes more than 10-times the cost of regular insurance—are often unnecessary because the car renter’s personal auto insurance covers the risk. At least 60 percent of normal auto insurance policies delivered in America cover when the policyholder drives a rental car if the policyholder has collision coverage on the policyholder’s own vehicle. Further, major credit cards frequently cover some or all of these risks.

Reverse competition appears to be a major problem in other lines as well (e.g., private mortgage and bond insurance).

In the second part of this two-part opinion, the author proposes some fixes to the problems caused by reverse competition: “Steps Regulators and Legislators Should Take to End Reverse Competition Abuses.”

Carrier Management invites readers to weigh in. Is there something broken that needs to be fixed in these lines? How can the usual dynamics of competition be restored to the benefit of customers?