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REINSURANCE |
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Introduction Reinsurance and coinsurance are no mystery. Reinsurance allows the primary carrier to minimize their primary amount of liability, spread the risk, stabilize annual returns, and gain surplus reserves which allows the primary insurer to write additional policies. Without reinsurance, most primary carriers would quickly reach the legal limit of their business as permitted under applicable state regulation. Both concepts have a common basis, the sharing of risk. Both protect the insured and the title insurer by recognizing the possibility that claims may arise at some future date for which payment may be made and, thereby, limits the exposure of any one company to the extent of loss suffered. In today's large dollar transaction, the assets of an individual title insurer are often not sufficient to support the insurance liability undertaken. Even if sufficient assets are present institutional lenders will often require that the liability be spread anyway, to insure that, in the event of a later claim upon title, there will continue to be sufficient assets and claim reserves from which the claim may be paid. For these reasons, reinsurance is a critical element of the title insurance business and the underwriting process. Retention Limits A title insurance company can issue a policy on a single risk in any amount. However, the amount of liability retained by a particular insurer may be restricted by one or more of the following: self imposed limits determined by the application of sound business judgment; acceptability of the insured and its lender; or by state statutory or regulatory provisions. Generally speaking, the most restrictive of these three factors must be followed. Whenever the amount of a given risk exceeds the limits imposed by any one of these considerations the insurer will undertake to share the risk with other title insurers. These limits are subject to change annually. Factors Affecting Self Imposed Limits To the uninitiated, determining the maximum aggregate single risk liability may be surprising, and yet it is important to understand this concept in order that the title insurer not be unintentionally over exposed. With the exception of the issuance of simultaneous owners and purchase money mortgage policies, every policy represents a separate underwriting risk. For example, multiple policies issued on a single parcel of property insuring various estates or interests therein [Fee, Leasehold, Option, Leasehold Mortgage, etc.] creates cumulative exposure (there is no non-cumulative provision between fee and leasehold policies as there is between owner's and mortgagee policies). The amount of cumulative exposure constitutes a single risk. Phased construction would constitute a single risk. Undertaking to insure a multiple site transaction may be considered a single risk where the mortgage documents contain cross collateral or cross default provisions. In providing certain endorsements to the underlying policy the title company may subject itself to single risk liability. Examples of such coverage may be where the insurer is asked to issue cluster, spreader, tie-in or non-imputation endorsements. Multiple policies issued for a single site should be reviewed to determine an insurers aggregate liability. Endorsements for shared appreciation, interest rate swaps and variable mortgage interest rates with negative amortization increase the liability above the insured amount shown in Schedule A of the policy. These additional amounts are also included in single risk liability. To varying degrees, each title insurer maintains a claims loss history, a reinsurance record and premium/loss history, which in part will affect, inter
alia, its primary retention limit beyond which it will not retain liability. These self imposed Reinsurance Retention Limits may change peri>
is there any single factor or common risk which affects a group of properties or policies which have an aggregate liability in excess of the self imposed limit?
examples may include a tie-in endorsement; stock transfers or a substitution of partnership interests involving a common partner or participant in ownership of the purchaser or mortgage of multiple sites; or the existence of cross collateralization or cross default provisions in the mortgage documents; does this transaction involve more than one property or require the company to retain more than its self imposed limit of $X per parcel, up to in excess of its maximum transactional risk, in multiple parcel transactions or series of transactions closing over a period of months? examples may include a blanket loan on multiple parcels; a
REIT; a chain of does this transaction involve a
pari- passu endorsement or phased construction with issuance of multiple policies for different participating lenders at each stage which have an aggregate liability in excess of the self imposed limit or greater? does this transaction involve multiple policies (or group of existing policies) on one examples may include Shopping centers; various building in an office park; fee
Evaluating Financial Strength Historically, there were two ways of evaluating a title insurer's financial strength. One was by reviewing the financial statements made available by title companies in their annual report. The other was by review of the annual NAIC Form 9 Financial Statement. Each year insurers are required to file Form 9 Statements in the various states where they are authorized to transact business. Corporate financial statements are based upon generally accepted accounting principles
(GAAP), whereas Form 9 information is in statutory format.These statements must be evaluated properly when determining a particular insurers financial capability. Conclusions drawn from Form 9 data will not be the same as when using statements based on
GAAP. Consequently, each year, institutional lenders review all title insurers NAIC Form 9 Statements. The review entails a detailed analysis of various underwriters assets and liabilities. From this review each institutional lender makes its own determination of a title insurer's strength and liquidity. In the text entitled Structuring Complex Real Estate Transactions, author James L. Lipscomb sets forth an excellent overview of coinsurance and reinsurance considerations frequently taken into account by institutional lenders, particularly with regard to the methods of evaluating title insurers financial strength. While those considerations remain valid to this day, that text was published in the late 1980's just prior to the time in which the industry as a whole began to experience a rise in title losses. Solvency Concerns Between 1987 and 1992 industry claims losses averaged
around 10%, roughly twice the figure found to be acceptable in industry
profitability studies, while premiums remained flat. During that same term the
title industry lost, collectively, hundreds of millions of dollars in claims
resulting from a combination of creditors rights issues, fraud, forgery,
defalcations and the "usual" historical title losses incurred [see
ALTA First Annual Legal Symposium program materials presented in part by
Richard McCarthy, ALTA Research Director, Royal Orleans Hotel, New Orleans,
Louisiana, April 22, 1996]. These losses caught the attention of Eric Berg, A
reporter for the New York Times, who wrote a doomsday scenario stating that the
industry was about to fail and that in doing so it would take Fannie Mae and
Freddie Mac with it. That did not happen. But as a result, the title insurance
industry's age of "benign neglect" was over [see Title Management Today, March, 1994]. The fallout
was cumulative. Proponents of regulation pointed out that historically the industries single risk exposure on any one transaction was self contained, i.e., kept within the industry. If you compared the total liability assumed by the industry collectively to the collective industry statutory claims reserves you discovered that the total industry claims reserves were very small when compared with the total liability assumed. Some suggested that liability (particularly reinsurance liability) was spiraling out of control [note that these concerns were taken seriously by the ALTA Reinsurance Committee in their 1994 and 1995 annual meeting agenda]. Industry solvency concerns were expressed by HUD, the Office of the Controller of Currency, the Federal National Mortgage Association (FNMA), and the National Association of Insurance Commissioners
(NAIC), including whether it was necessary to set standards on how solvent title companies need to be. The principal concern expressed among these regulators was that if industry losses were to continue unabated at the 1987-90 rate Mr. Berg's analysis may prove correct. This prompted Fannie Mae to announce that hereafter, all companies that issue title insurance policies with connection to loans must have an acceptable rating as performed by a Fannie Mae approved company. This in turn led to the formation of an ALTA working group to work with the various national & state regulators to address those concerns. One outcome of these discussions was the acceptance and recognition by ALTA of the title insurance rating agencies named after the Fannie Mae announcement. Those companies are Standard and
Poors, Demotech, Lace and Duff. Those companies now rate and report the strength of all underwriters annually. Another outcome of these concerns was the adoption of the Creditors' Rights Exclusion by the ALTA Forms Committee in 1990 [see Chapter 5, Creditors Rights Issues Affecting Title Insurance, Collier Real Estate Transactions and the Bankruptcy Code]. These concerns also resulted in new Form 9 reporting requirements. Forms 9 Changes New Form 9 reporting requirements began in 1997. The form 9 Statement was substantially revised [see CDS Performance of Title Insurance Companies, 1997 Edition]. Initially, as a result of the form 9 changes, a number of title insurance underwriters hired specialized actuarial accounting firms to annually review and determine any adjustments which may be necessary to increase claims reserves based upon historical data, even if the existing reserves were sufficient to comply with state regulatory requirements. The result over the past five or six years is that many underwriters have voluntarily increased their reserves beyond that which may be required by statute and have adopted "actuarial reserves". In some instances this has affected how their balance sheets look. According, it is not surprising that primary liability and retention limits change from year to year in accordance with changes in financial strength reflected by these statements and analyses. Other Comparative Data Yet another result of the regulatory changes is the annual publication of the CDS Performance of Title Insurance Companies by Corporate Development Services, Inc., of Wayne, Pennsylvania., which, inter
alia, presents various statistical studies including the comparative statutory operating and investment results and statutory financial positions of 85 insurers nationally. Take note that of these 85 insurers, half (42 actually) are owned and operated by the 7 major underwriters and grouped into families, leaving 43 independents. Lastly, thers fact and undertake to obtain the lenders reinsurance requirements in the early stages of title coverage negotiations. This is critical to the title insurance underwriting process because any special problems, extra-hazardous risks or special coverage requests made by the proposed insured upon the primary insurer must not only be disclosed by the policy issuing office to the primary insurers Home Office for their review and approval, the Home Office of the primary insurer in turn must thereafter notify the perspective
reinsurer(s) of those risks or requests for their (the reinsurers) evaluation, approval and acceptance. All this takes time and may require further discussion among the various insurers, which discussion may include the requirement of additional risk premium. These details and discussions cannot be left to the last minute or conducted under the stress of time constraints. TLA© enjoys a cordial reinsurance relationship with reinsurance department staff members of many national underwriters. Upon request, we will act as intermediaries or provide anticipatory guidance so that your transaction goes through the reinsurance underwriting process with as little difficulty as possible. Other Comparative Data Yet another result of the regulatory changes is the annual publication of the CDS Performance of Title Insurance Companies by Corporate Development Services, Inc., of Wayne, Pennsylvania., which, inter
alia, presents various statistical studies including the comparative statutory operating and investment results and statutory financial positions of 85 insurers nationally. Take note that of these 85 insurers, half (42 actually) are owned and operated by the 7 major underwriters and grouped into families, leaving 43 independents. Lastly, there was the acceptance of Capital Re into the ALTA community, thus allowing for the spreading of reinsurance risk beyond the industry proper. All of these factors, in addition to a particular title insurers financial strength, are taken into consideration by institutional lenders. In the latter instance, particularly those in the residential market, who want the flexibility to either hold mortgages in their portfolio or securitize and sell the mortgage in the secondary market. Need to Address Issue Early Notwithstanding all of the forgoing concerns, the fact remains that parties involved in commercial transactional title coverage negotiations will sometimes overlook or fail to consider that, in all likelihood, the lender involved in a large multi-million dollar commercial transaction will require either reinsurance or coinsurance be secured for liabilities of a specified dollar amount. This oversight can cause extra-strength last minute migraine headaches. Title company personnel should be sensitive to this fact and undertake to obtain the lenders reinsurance requirements in the early stages of title coverage negotiations. This is critical to the title insurance underwriting process because any special problems, extra-hazardous risks or special coverage requests made by the proposed insured upon the primary insurer must not only be disclosed by the policy issuing office to the primary insurers Home Office for their review and approval, the Home Office of the primary insurer in turn must thereafter notify the perspective reinsurer(s) of those risks or requests for their (the reinsurers) evaluation, approval and acceptance. All this takes time and may require further discussion among the various insurers, which discussion may include the requirement of additional risk premium. These details and discussions cannot be left to the last minute or conducted under the stress of time constraints. TLA© enjoys a cordial reinsurance relationship with reinsurance department staff members of many national underwriters. Upon request, we will act as intermediaries or provide anticipatory guidance so that your transaction goes through the reinsurance underwriting process with as little difficulty as possible.
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