In late April of this year California Insurance Commissioner Steve Poizner announced proposed "efficiency" reforms to the title insurance industry. These reforms are intended to reduce costs, resulting in savings that will be passed on to consumers. Chief among the reforms is a proposal to "limit marketing payments to individuals to no more than $25 per person per year." What is that all about?
Poizner, like commissioners before him and counterparts in other states, is concerned about the character of competition in the title insurance business. It's not that there is a lack of competition -- there's plenty -- but the competition doesn't result in lower rates to consumers.
Increasing market share is as important to title insurance companies as it is to producers of automobiles, breakfast cereal, baseball bats, etc. Attempts to increase market share are usually brought about by product improvement, price reduction, marketing efforts, or a combination of those. In the case of title insurance, though, the first alternative is not much of an option -- there are very few basic or bells-and-whistles improvements to make to a title insurance policy. The second alternative, for reasons we shall examine, is generally ineffective, leaving almost all efforts to be directed toward marketing.
Various state and federal regulatory agencies have noted in reports that the title insurance business is characterized by "reverse competition." The expression itself is hardly illuminating, but the reality behind it was first spelled out in a 1977 Department of Justice study. There it was noted that, in competing for business, title insurance companies don't market their wares to consumers. You don't see ads for title insurance on TV or in print media as you do for other products, including auto, home, and health insurance.
People don't often purchase title insurance -- generally only at the time of purchase or refinance. When they do, they are not liable to know much about it. Instead of informing themselves about title insurance products and costs, they are inclined to rely on the referral advice of agents, lenders, and escrow officers. Hence, it is those third parties -- potential referral sources -- to whom title insurance marketing is directed.
But very, very little of that marketing consists of efforts to inform those third parties about the products or their costs. A 1986 state of Washington Insurance report puts it bluntly. "In fact, consumers are bypassed completely as title companies spend nearly all of their marketing budgets 'wining and dining' real estate agents, banks, lenders, builders, developers, and others in an effort to convince these middlemen to steer their home-buying clients to their companies for their title insurance needs."
Several years ago the state of Washington adopted regulations (RCW 48.30.140 & 48.30.150) that prohibit giving anything greater than $25 in a twelve-month period to any person as inducement or reward for placing or causing the placement of title insurance business. This is the same as the California proposal.
But, based on investigations conducted over 2005 and 2006, there has been little compliance with the Washington regulation. The 2006 report on the title insurance business in Washington said, "this industry is rife with practices gone haywire." It noted violations that occurred in co-advertising, hosting broker open houses, providing food for office meetings, subsidizing the costs of classes, outright giving of gifts, underwriting the costs of holiday parties, paying for lunches, and much, much more.
California law, like federal law under the Real Estate Settlement and Procedures Act (RESPA) already has prohibitions against providing real estate agents and others with various items of value as inducements to refer title insurance business. But neither of those provides a "bright line" definition as the $25 rule does.
It will remain to be seen if Commissioner Poizner's plan for California will work better than the similar regulation has so far in Washington. Even if it does -- a very large "if" -- it is not clear that this would result in a reduction of consumer costs. The immediate effect of reducing marketing costs, of course, would be to increase profit margins. If Commissioner Poizner also wants to introduce regulatory limits to profits, that would no doubt entail a sizeable political battle.