State Insurance Commissioner John Garamendi on Monday widened his investigation of the title insurance industry to include whether companies were overcharging for policies.
During a daylong hearing in downtown Los Angeles, Garamendi grilled top title insurance industry executives about the practice of sharing customer premiums with home builders, real estate brokers and other partners.
The title industry calls the premium-sharing arrangements "captive reinsurance" programs in which they also share half the risk of future insurance losses with their partners. Garamendi, however, contends the arrangements are fronts for illegal kickback schemes in which the partners are given the premium money in exchange for steering business to the insurers.
He has accused two of the biggest title companies -- Jacksonville, Fla.-based Fidelity National Financial Inc. and Richmond, Va.-based LandAmerica Financial Group Inc. -- of being among the worst offenders.
"They are giving a large portion of their premium dollars to the captive reinsurance companies, but the risk is not commensurate with the price," Garamendi said.
The average title policy in California runs about $1,400. Lenders require title insurance when financing a property transaction to guarantee that there are no other ownership claims on the property.
On Monday, title executives acknowledged that only about 6% of title premiums collected are paid out in claims. Both LandAmerica, which had sales of $3.5 billion last year, and Fidelity National, which posted $8.3 billion in sales, testified that their captive reinsurance businesses represented less than 1% of their total revenues.
"The risk being transferred is not illusory," said Frank Willey, Fidelity National's vice chairman and a former company president. However, during its 2004 fiscal year, Fidelity reported zero losses recovered from its reinsurers and estimated zero future recoveries on claims.
Theodore Chandler, chief executive of LandAmerica, said his company set aside $714 million in reserves as of Dec. 31 to pay possible future claims but couldn't say how much of that would probably go toward captive reinsurance claims.
"Any one claim could be catastrophic," he said, adding that home buyers benefit from captive reinsurance programs because they provide "one-stop shopping" for property settlement services, particularly for the buyers of new homes.
Richard Robinson, senior vice president of William Lyon Homes Inc., said his company formed a separate reinsurance arm after Fidelity suggested it do so in 2000. "We agreed to take on 50% of the risk," he said.
Garamendi said the title companies' willingness to split their premium profits suggested that policies were too high to begin with and that the programs had more to do with marketing than insuring risk.
"Ceding 50% of their premiums indicates there's a whole lot of fat in the game," he said.
Examining the captive reinsurance issue "provides a window to look at whether rates may be far higher than justified," Garamendi said.
Garamendi requested additional information from the title companies Monday before he could determine whether the companies violated California law.