For example, property-casualty insurers’  losses and loss adjustment expenses accounted for approximately 73  percent of written premiums in 2005. Title Insurance Market Is Highly Concentrated at the Insurer Level, but Otherwise Differs across States

Title insurance markets can be described by various characteristics, such  as the following:    While high market concentration exists among national title insurers, they  market insurance through large numbers of independent and affiliated  agents, with the mix varying across states. The use of ABAs—in which a real estate professional, such as a real estate  agent, owned a share of a title agency—varied. These practices  varied within as well as across states. Multiple Factors Raise Questions about the Extent of Competition and the Reasonableness of Prices in the Title Insurance Industry

Among the factors raising questions about the existence of price  competition and the resulting prices paid by consumers within the title  insurance industry are the following:    consumers find it difficult to shop for title insurance, therefore, they put  little pressure on insurers and agents to compete based on price; title agents do not market to consumers, who pay for title insurance, but to  those in the position to refer consumers to particular title agents, thus  creating potential conflicts of interest;   a number of recent investigations by HUD and state regulatory officials  have identified instances of alleged illegal activities within the title  industry that appear to reduce price competition and could indicate  excessive prices;   as property values or loan amounts increase, prices paid for title insurance  by consumers appear to increase faster than insurers’ and agents’ costs;  and in states where agents’ search and examination services are not included  in the premium paid by consumers, it is not clear that additional amounts  paid to title agents are fully supported by underlying costs. Third, title insurance is a smaller but required part of a larger transaction  that consumers are generally unwilling to disrupt or delay. Rather, title agents market to and  compete for referrals from real estate and mortgage professionals. This  puts consumers in a potentially vulnerable situation where, to a great  extent, they have little or no influence over the price of title insurance but,  at the same time, they have little choice but to purchase that insurance. Furthermore, federal and state regulators have identified a number of  recent allegedly illegal activities related to the marketing and sale of title  insurance, which suggests that some in the title insurance industry are  taking advantage of consumers’ vulnerability. HUD and  several state regulators have already begun to take steps in this area, but  these efforts often face challenges, such as HUD’s limited enforcement  authority, statutory limitations of RESPA, potentially confusing  regulations, and a lack of coordination among multiple regulators. Ultimately,  because of the involvement of both federal and state regulators, including  multiple regulators at the state-level, effective regulatory improvements  will be a challenge and will require a coordinated effort among all  involved. Key contributors to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

We previously provided a report and testimony identifying characteristics  of current title insurance markets that merited additional study, including  the extent to which title insurance premium rates reflect underlying costs  and the extent of state oversight of title agents and other real estate  professionals. This report focuses on issues related to (1) the  characteristics of title insurance markets across states, (2) the factors that  raise questions about prices and competition in the industry, and (3) the  current regulatory environment and planned regulatory changes. The existence of ongoing or past Department of Housing and Urban  Development (HUD) investigations in the state. To assess the current state and federal regulatory environment, we  reviewed laws and regulations, and interviewed key regulators. Understanding these costs  would require state insurance regulators to gather and analyze financial  data on title agents.
Why GAO Did This Study

In a previous report and testimony, GAO identified issues related to title insurance markets, including questions about the extent to which premium rates reflect underlying costs, oversight of title agent practices, and the implications of recent state and federal investigations. This report addresses those issues by examining (1) the characteristics of title insurance markets across states, (2) factors influencing competition and prices within those markets, and (3) the current regulatory environment and planned regulatory changes. To conduct this review, GAO analyzed available industry data and studies, and interviewed industry and regulatory officials in a sample of six states selected on the basis of differences in size, industry practices, regulatory environments, and number of investigations.

What GAO Found

The U.S. title insurance market is highly concentrated at the insurer level, but market characteristics varied across states. In 2005, for example, five insurers accounted for 92 percent of the national market, with most states dominated by two or three large insurers. Variations across states included the way title agents conducted their searches as well as the number of affiliated business arrangements (ABA) in which real estate agents, brokers, and others have a stake in a title agency. Finally, premiums varied across states due to cost and market variations that can also make understanding and overseeing title insurance markets a challenge on the national level. Certain factors raise questions about the extent of competition and the reasonableness of prices that consumers pay for title insurance. Consumers find it difficult to comparison shop for title insurance because it is an unfamiliar and small part of a larger transaction that most consumers do not want to disrupt or delay for comparatively small potential savings. In addition, because consumers generally do not pick their title agent or insurer, title agents do not market to them but to the real estate and mortgage professionals who generally make the decision. This can create conflicts of interest if those making the referrals have a financial interest in the agent. These and other factors put consumers in a potentially vulnerable situation where, to a great extent, they have little or no influence over the price of title insurance but have little choice but to purchase it. Furthermore, recent investigations by the Department of Housing and Urban Development (HUD) and state insurance regulators have identified instances of alleged illegal activities within the title industry that appeared to take advantage of consumers' vulnerability by compensating realtors, builders, and others for consumer referrals. Combined, these factors raise questions about whether consumers are overpaying for title insurance. Given consumers' weak position in the title insurance market, regulatory efforts to ensure reasonable prices and deter illegal marketing activities are critical. However, state regulators have not collected the type of data, primarily on title agents' costs and operations, needed to analyze premium prices and underlying costs. In addition, the efforts of HUD and state insurance regulators to identify inappropriate marketing and sales activities under the Real Estate Settlement Procedures Act (RESPA), have faced obstacles, including constrained resources, HUD's lack of statutory civil money penalty authority, some state regulators' minimal oversight of title agents, and the increasing number of complicated ABAs. Finally, given the variety of professionals involved in a real estate transaction, a lack of coordination among different regulators within states, and between HUD and the states, could potentially hinder enforcement efforts against compensation for consumer referrals. Because of the involvement of both federal and state regulators, including multiple regulators at the state level, effective regulatory improvements will be a challenge and will require a coordinated effort among all involved.