Joseph L. Petrelli, Demotech, Inc. 614 -761- 8602.

Joseph L. Petrelli, Demotech, Inc.614 -761- 8602

Incorporated in 1985, Demotech, Inc. is a financial analysis firm serving the P&C and Title insurance industries. In 1989, we became the first company to review and rate regional and specialty insurance companies. In 1992, we became the first company to review and rate Title underwriters.

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1. Title insurance coverage is retrospective, from the policy effective date.

2. P&C insurance coverage is prospective, from the policy effective date.

3. These timeframes of coverage in conjunction with cost containment activities have not been properly reflected in Title insurance financial reporting requirements.

Although Demotech, Inc. first discussed this in 2006, regulatory authorities have not yet adopted procedures and practices to address the situation. A grass roots effort by title agents would be helpful.

Let’s take a fresh look at Title insurance and the coverage provided in a Title insurance policy.

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The term “title insurance” means a contract of insurance against loss or damage on account of encumbrances upon or defects in the title to real estate.

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The term “title search” means a search and examination of the public records sufficient to determine:

1. Ownership of;

2. Encumbrances on;

3. Liens on; and

4. Defects in the title to;

the real estate that is the subject of the search.

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Summary of some covered risks under the American Land Title Association (ALTA) Loan Policy – 2006 edition.

1.Title being vested other than as stated in Schedule A

2.Any defect in or lien or encumbrance on the Title. The Covered risk includes but is not limited to insurance against loss from …

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A defect in Title caused by:

1.Forgery

2.Fraud

3.Undue influence

4.Duress

5.Incompetency

6.Incapacity

7.Impersonation

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8. Failure to authorize a transfer or conveyance

9. Improperly created, executed, witnessed, sealed, acknowledged, notarized or delivered document(s)

10. Documents executed under falsified, expired or otherwise invalid power(s) of attorney

11. Documents not properly filed, recorded or indexed in the Public Records

12. Defective judicial or administrative proceeding

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13. Lien of real estate taxes or assessments imposed on the Title by a government authority due or payable, but unpaid.

14. Encroachment, encumbrance, violation, variance or adverse circumstance affecting the Title that would be disclosed by an accurate and complete land survey

15. Unmarketable Title

16. No right of access to and from the land

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Subject to the exclusions from coverage, the exceptions from coverage contained in Schedule B and the conditions and stipulations, the Title insurance company, as of the Date of Policy shown in Schedule A, against loss or damage…

Coverage is Retrospective.

In Consideration of the Provisions and Stipulations herein, the Property and Casualty Insurance Company, for the term of this date at 12:01 a.m. to one year later at 12:01 a.m. at the location of the property involved, does insure…

Coverage is Prospective.

Title is Retrospective

Incident must have occurred prior to policy date to be considered covered

P & C is Prospective

Incident must occur within policy period to be considered covered

Date of Policy

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National Association of Insurance Companies (NAIC) Casualty Actuarial Task Force Recommendation to the NAIC’s Accounting Practices and Procedures (Ex4) Task Force.

To eliminate confusion arising from the association of the term “allocated” with the ability to assign expenses to a specific claim, NAIC approved a Blanks proposal in 1999.

Loss adjustment expenses were no longer “allocated” or “unallocated” rather “Defense and Cost Containment” or “Adjusting and Other.”

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1. Surveillance expense

2. Litigation management expense

3. Fees or salaries for appraisers

4. Fees or salaries for private investigators

5. Fees or Salaries for fraud investigators

6. Attorney fees incurred owing to a duty to defend, even when other coverage does not exist

7. Cost on engaging experts

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1. Fees of adjustors and settling agents

2. Attorneys fees incurred in the determination of coverage, including litigation between the insurer and policy-holder

3. Fees or salaries for appraisers, private investigators, hearing representatives, fraud investigators in the capacity of an adjustor

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An expense directly allocated to a particular claim or incident.

Addressing specific defects

Everything in Schedule B?

The profitability of title underwriters or Title agents will not change if curative and mitigation expenses are more accurately allocated from “agent retention” to “loss adjustment expense.”

An initial study prepared by Demotech, Inc. suggests that the Title industry loss and LAE ratio, on this proposed basis, would increase by 70%, to about 78%, and the Title industry expense ratio would decline by 70%, to about 25%.

The net effect? Title operating results are comparable to P&C results!

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Regrettably, the financial reporting necessary to accomplish this has not been promulgated. Absent the financial information needed to silence critics of Title insurance, regulators remain focused on perceived excess profits in the Title insurance industry.

Recent events indicate to me that agents are in the cross-hairs.

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General Information1Calendar year reporting2State reporting for3Agent/Agency/Firm Name a) d/b/a (if applicable)

4Federal tax ID/SSN (for Underwriter Direct Operations: use NAIC Company Code)

Parent Company EIN (if applicable) (for Underwriter Direct Operations: use NAIC Group Code)

5License number (for this state)6Address (line 1)

Address (line 2)CityStateZip

7Contact person8Contact phone9Contact e-mail

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Agency Information10Independent11Affiliated (owned by underwriter)12Underwriter direct

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Is reporting agent an Affiliated Business Arrangement (affiliated with real estate brokerage, mortgage company, etc.)? (Y)es/(N)o. If Yes, List affiliated business names on Appendix A

14Agency/Branch Type:Title & closing (full service)Title onlyClosing onlyAttorney title

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Agency Information

15State of domicile/residence of Reporting Entity/Person

16Number of states in which Reporting Entity operates (list all states on Appendix) A

17Date originally licensed (for this state)

18Percentage of business for this state (by premium)

a) Percentage of law firm revenue

19Number of underwriter appointments, contracts, or agreements. (List underwriters and percentage of business for each on Appendix A)

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Agency Information

20 No. of employees (total FTE - as of last date of reporting period)a) No. of FTE on March 31 (end of Q1)b) No. of FTE on June 30 (end of Q2)c) No. of FTE on September 30 (end of Q3)d) No. of FTE on December 31 (end of Q4)

21 Licensed employeesa) No. of licensed FTE on March 31 (end of Q1)b) No. of licensed FTE on June 30 (end of Q2)

c) No. of licensed FTE on September 30 (end of Q3)

d) No. of licensed FTE on December 31 (end of Q4)

List licensed employees (both allocated and unallocated employees) accounted for in Lines 21(a), (b), (c), and (d) on Appendix A

22 Unlicensed employees

a) No. of unlicensed FTE on March 31 (end of Q1)

b) No. of unlicensed FTE on June 30 (end of Q2)

c) No. of unlicensed FTE on September 30 (end of Q3)

d) No. of unlicensed FTE on December 31 (end of Q4)

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Risk Assumption

23Open Title Orders

24Closed Title Orders in Which Policy Was Issued

25Total number of policies issued in reporting perioda) Residential Policiesb) Non-residential Policies

26a) Number of searches billed to 3rd parties

b) Number of searches purchased from 3rd parties

27Number of non-insurance title products produced

28a) Total settlement/escrow/closing transactions conducted

b) Number of line 28 that were sale/purchase settlement/escrow/closing transactions

29Number of settlement/escrow/closing transactions conducted in which a title policy was not issued

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Income

30Premium written

31Premium remitted to underwriters32Settlement/closing/escrow income33Title examination income34Abstract/search income35Income from cancelled orders36Investment income37All other income

38Total income (automatically totals)

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Expenses

39 Employee compensation40 a) Contract labor (1099)

b) Temporary labor (non-1099)41 Payroll taxes42 Employee Benefits43 Rent, utilities, and repair

44 Title plant maintenance/subscription expenses45 Abstract/search expenditures46 Computer/software

a) Depreciation (if applicable)47 Business insurance48 Business legal49 Accounting50 Licenses, taxes, and fees51 Marketing/sales52 Travel and lodging53 Employee education54 Bank charges55 Charge offs56 Miscellaneous expense

57 Total business expenses (automatically totals)

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Loss, Loss Mitigation, and Underwriting Expenses

58 Title losses paid and not reimbursed by underwriter or included in underwriter loss reservesa)Title Loss Files Openedb) Title Loss Files Paid

c) Reimbursements paid to underwriter for title losses59 Closing/Escrow losses

a) Number of Closing/Escrow Losses resulting from escrow shortagesb) Total amount of funded shortages

60 Abstract/search losses (from abstracts/searches sold)

61 Title loss-related and Closing/Escrow loss-related legal expenses62 Deductibles paid63 E&O insurance premiums64 Fidelity/Surety bond premiums

65 Total loss expenses (automatically totals)

66 Total expenses (automatically totals)

67 Net income before taxes (automatically totals)68 Federal income tax incurred

69 Net income (automatically totals)

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Risk Identification including Mitigation

Schedule B – Part 1 Items Identified

Schedule B – Part 2 Items Identified

Items Identified Not on Schedule B – Part 1 or Part 2

Total Items Identified (33)+(34)+(35)

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This proposal is not a statistical plan. It is a financial reporting plan. It measures financial outcomes only, it does not collect the data necessary to understand the activity that occurs at the policy level.

Example: Pitchers versus all other baseball players.

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State Policies in Sample Incidents in Schedule B

Colorado 83 888

Florida 43 248

Louisiana 114 585

North Carolina 270 3,323

All Samples 510 5,044

Given the retrospective coverage in a Title insurance policy, loss adjustment expense is expended PRIOR to policy issuance. These efforts resolve matters that would manifest themselves subsequent to policy issuance.

Financial reporting requirements are based upon P&C policies, which are prospective. This reporting overstates the Title expense ratio and understates the Title loss adjustment expense ratio.

Unless and until the value proposition of Title insurance – curative efforts, mitigation, analysis, etc. is captured and reported to regulators, the failure to communicate will continue.