How Coronavirus Is Impacting the Title Insurance Industry

The coronavirus has impacted everything. The title insurance industry is no exception. Like everyone else, title insurance companies are wondering where the road ahead is going.

Historically, hazard insurance premiums and losses have been highly correlated with economic activity. This is particularly true for title insurance companies where losses are highly correlated with the real estate market. However, the novel coronavirus has generated novel conditions.

There’s been a colossal upsurge in home buying and home loan refinancing spurred by mortgage rates ranging from just below three percent to just over six percent. Simultaneously, millions of homeowners could default due to widespread virus-related income losses.

To assess the future for title companies, we must first examine the real estate market and determine how that market is playing out.

In the first quarter of 2020, single-family refinance loans almost doubled compared to 2019. Refinance loans are less risky for title insurers, so the loss ratio for the 2020 policy year will probably be low.

In the real estate market, the 30-year fixed mortgage rate has hovered at three percent. The challenge is to determine what might happen when interest rates go up and refinance loans go down.

Overall, the economy has gone south since the pandemic was unleashed. We had a negative GDP during 2020’s first two quarters. Unemployment is growing, and the Dow slid beneath 19,000 in March. The upshot is a bear market launched by shutdowns.

There are two types of title insurance companies. The “big four” and their members write over one billion dollars in direct written premiums annually. These companies are Old Republic, First American, Fidelity National and Stewart. There are also small to mid-size companies not affiliated with the big four.

When looking for trends, the big four and the smaller companies perform differently. That means they must be assessed separately.

Industry insiders believe that the destiny of the 30-year mortgage rate will reflect what happens with the pandemic. Another shutdown could trigger even lower interest rates.

On the other hand, a vaccine could put everyone back to work. As the economy begins to recover, interest rates would rise and refinance loans would drop off.

For title insurance companies, losses could increase. Preparing for this possibility requires insurers to be cautious about booking their loss ratios.

It’s essential to stay on top of developments in the economy and in the real estate market that could potentially affect title insurance losses.

In general, small and mid-size title insurance companies have fewer losses than the big four. This could be due to lower defalcation. Fewer defalcations is likely due to greater use of affiliated agents with lower loss ratios.

Another possibility is that smaller companies underwrite policies in low loss ratio states while avoiding high loss ratio states.

Many smaller companies are reaching into new territories. As a result, they have greater rate changes than the big four. This growth intensifies the existing uncertainty.

As 2020 draws to a close, many people are hoping for a better 2021. We’ve learned from the many hurdles that 2020 has presented. As 2021 kicks off, we’ll learn even more.

Prudence in all things is advisable. It’s important to appreciate the increased homebuying activity over the last year. Loans were closed regardless of the virus. The long term effects of 2020 on the economy have yet to be discovered.

Title insurance companies wishing to stay in the game are advised to closely monitor real estate and economic trends. Get a thorough understanding of how those trends can affect the frequency and severity of losses. It will help you make smart decisions about the future.

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