Transcript Download Handout 1

Reserving for Title Insurance
2004 Casualty Loss Reserve Seminar
Paul J. Struzzieri, FCAS
Milliman, Inc.
September 14, 2004
Outline
I.
Introduction to Title Insurance
II.
Financial Reporting Issues
III.
Actuarial Challenges & Methods
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I) Introduction to Title Insurance
a) Types of Policies
b) Coverage
c) Unique Issues
d) Markets
e) Distribution
f)
Reinsurance
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Types of Title Insurance
Policies
a) Purchase Mortgages
i. Lender Policy – based on $ amount
of loan
ii. Owners Policy – based on $ amount
of purchase
b) Refinance Mortgages
i. Lender requires new policy
ii. Owners keep original policy
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Purchase vs. Refi Mortgages
(amounts in billions)
$4,000
$3,600
$3,200
$2,800
$2,400
$2,000
$1,600
$1,200
$800
$400
$0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Refinance Volume $174
$420
$530
$185
$134
$228
$242
$754
$437
$195 $1,117 $1,426 $2,515
$388
$474
$490
$584
$505
$557
$592
$754
$848
$829
Purchase Volume
Purchase Volume
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2001
2002
2003
$914 $1,032 $1,295
Refinance Volume
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Coverage
a)
b)
c)
Lender’s and owner’s interests are
protected
Cost to cure the defect; plus defense
costs
Common title problems:
Defects, liens, easements – catch during
search
ii. Hidden hazards – undisclosed heirs, forged
deeds
iii. Unmarketability of title
iv. Defalcations
i.
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Coverage Example #1
Young couple buys home from
widow (whose husband died
without a will).
 Widow’s son shows up and claims
a share of the home.
 Title insurance pays the missing
heir the value of his share.

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Coverage Example #2

Just prior to closing, a prior lien is
discovered.

For example, a paid but unreleased
mortgage.

Purchaser can decide not to close
based on this discovery.

Title insurance policy will respond if
unmarketable.
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Issues Unique to Title Insurance
a) Loss is “incurred” prior to policy
issuance
b) No policy expiration date  how
to earn premium?
c) Goal of title search & examination
= loss elimination
d) High expense ratios (90%+); low
loss ratios (4-10%)
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U.S. Market Share
2003 DWP
Share
$4.9B
32%
2) First American
3.3B
21%
3) Land America
2.8B
18%
4) Stewart Title
1.8B
12%
5) Old Republic
1.0B
6%
Subtotal
13.8B
89%
1.7B
11%
15.5B
100%
1) Fidelity National Financial
All Others
Total
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International Markets
a) Canada
b) Australia
c) Europe
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Distribution Channels
a) Agency Business (86%)
i. Independent Agents – including
attorneys (59%)
ii. Owned Agencies (27%)
b) Direct (14%)
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Reinsurance
a) Typically excess of loss
b) Larger title insurers reinsure
the others
c) Assumed and ceded = offset
each other
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II) Financial Reporting Issues
a) Financial Reporting
i. Form 9
ii. Statement of Actuarial Opinion
b) Categories of Statutory Reserves
c) Reserve Testing
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Financial Reporting
a)
Form 9 = Statutory Annual Statement
b)
Schedule P
i.
ii.
By Policy Year
By Report Year
c)
Statement of Actuarial Opinion – since
1996 Annual Statement
d)
Opine on Schedule P reserve, NOT
booked reserve
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Categories of Booked Reserves
a) Known Claims Reserve
b) Statutory Premium Reserve
(SPR) = “Unknown” Claims
SPR Functions as Unearned
Premium Reserve
ii. Formula = Amount & Take-down
Pattern
i.
c) Supplemental Reserve
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Reserve Testing
a)
Compare Schedule P Reserve against
Known Claims Reserve + SPR
b)
Schedule P includes Known Claims,
so really testing SPR vs. IBNR
c)
If SPR > IBNR, book SPR
d)
If IBNR > SPR, book SPR +
Supplemental Reserve
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Industry Reserves
@ 12/31/03

Known Claims
=
$556M

SPR
=
3,258M
Total
=
$3,814M
Schedule P
=
$2,741M

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III) Actuarial Challenges
a)
Title insurers do not know the number of
policies in-force!
b)
Correlation between calendar year loss
emergence and mortgage rates
c)
Refi policies have lower loss ratios than
original title policies
d)
Commercial vs. residential policies
e)
New products
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Actuarial Methods – Loss
Development
a)
Paid and incurred loss development
triangles from Schedule P
b)
Industry composite data available
c)
Historical patterns can be distorted
i.
Drop in interest rates leads to refi’s
ii. When lender policy is refinanced, original
policy is extinguished.
d)
Try to adjust pattern
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Actuarial Methods –
Expected Loss Ratio
a) Expected Loss Ratio for refinance
policy is lower than original policy
b) Policy Year with high refinance %
expected to have lower loss ratio
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70.0%
12.0%
60.0%
10.0%
50.0%
8.0%
40.0%
6.0%
30.0%
4.0%
20.0%
2.0%
10.0%
0.0%
0.0%
Refi %
14.0%
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Title Loss Ratio
Refi Percentage vs.
Title Loss Ratio
Policy Year
Ultimate Loss Ratio
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Refi Percentage
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Actuarial Methods –
Expected Loss Ratio
a) Econometric modeling of
Expected Loss Ratio –
variables could include:
i. Mortgage rates
ii. Refinance percentage
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11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
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90
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Loss Ratio
Modeled Loss Ratio vs.
Actual Loss Ratio
Policy Year
Actual Loss Ratio
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Modeled Loss Ratio
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Actuarial Methods – Cape Cod
or Bornhuetter-Ferguson
a)
Combines Expected Loss
Ratio and Development
Methods.
b)
To calculate Expected Losses,
can use:
i.
Premium
ii.
Amount of Insurance
iii. Counts & Averages
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