California’s new insurance commissioner says he agrees with his predecessor that there’s a lack of competition among the state’s title insurance and escrow services providers, and that he stands behind a proposal for a cost-based rate cap.
Steve Poizner, who succeeded John Garamendi as the state’s top insurance regulator Jan. 8, today issued his first public statement on Garamendi’s proposed rate rollback. Poizner said that after meeting representatives of the title insurance industry, he has decided to support and “aggressively enforce” Garamendi’s proposed rate reductions.
“Numerous governmental and academic reports, including two by this Department, have found that title insurance markets do not function competitively to keep prices reasonable,” Poizner said in the statement. “Instead of lowering prices to attract consumer business, title insurers take advantage of the fact that homeowners, who pay for title and escrow services, do not typically shop for those services.”
Real estate agents, lenders and home builders, Poizner alleged, “steer homeowners to particular title companies. Title companies lavish legal and illegal inducements on those intermediaries to obtain the homeowners’ business and then pass those costs on to the unaware homeowner.”
The Silicon Valley entrepreneur said he is “a strong believer in the free market” and “skeptical of price regulation.” But Poizner said it was clear to him that the market is not functioning properly and that “strong government action is necessary to protect the public.”
Poizner’s statement came on the heels of a notice issued Wednesday by the California Office of Administrative Law, that it had “disapproved” Garamendi’s proposed rate rollback. The OAL reviews proposed regulatory changes to ensure they comply with state law.
The California Land Title Association and the Escrow Institute of California issued press releases Wednesday celebrating the OAL’s notice of disapproval, saying it validated the industry’s position that the insurance commissioner lacks the authority to roll back rates unless it has demonstrated they are excessive and that there is a lack of competition in the marketplace.
“We feel entirely vindicated in our belief that the regulations exceeded the Department’s statutory authority under the Insurance Code by illegally impairing competitive rate making and by replacing competition with government dictates in the title insurance marketplace,” CLTA Executive Vice President Craig Page said in a statement released Wednesday.
But Poizner said Thursday that the OAL notice, because it seeks clarification only on certain issues, in effect validates the insurance commissioner’s authority to roll back rates.
“The OAL’s review effectively validates the Department’s authority to issue such regulations, but OAL has asked the Department to make specific changes to clarify certain terms and eliminate certain ambiguities which OAL found,” Poizner said. “We will make clarifications, in consultation with industry and consumer groups, and resubmit the regulations. I am confident that they will be approved and that these important consumer-protection measures will go into effect.”
Page told Inman News Thursday that the CLTA has requested a meeting with Poizner, and is “committed to working with the commissioner to empower consumers in the title insurance marketplace.” Previous industry proposals to help consumers shop around for the best rates, such as an educational Web site, remain on the table, Page said.
On “a lot of these issues, it remains to be seen” what the OAL’s disapproval notice means, Page said. OAL officials said they would release a written decision detailing the issues raised in the disapproval notice within seven days.
If adopted, title insurance companies would submit detailed information on their costs beginning in 2008, and profits would be limited to a percentage of the industry average. It’s unknown what rates would be under the formula, although they are expected to be considerably less.
If the companies refuse to provide cost information, rates would be rolled back in 2009 to 2000 levels, after adjustments for inflation and the increased liability from increased property values. Title insurance for home purchases would be reduced by 25.6 percent, and 9.8 percent for refinanced homes.
Reductions in escrow fees would be undertaken on a regional basis, with rates to be reduced by 23 percent in Southern California, 7.4 percent in the San Francisco Bay Area, and 23.6 percent in the rest of the state.
The $1 billion-a-year rollback was originally to be implemented in March, but Garamedi agreed to delay its implementation after public hearings on the proposal.
Garamendi, a Democrat who was elected lieutenant governor in November, commissioned a December 2005 study that alleged a lack of competition in the state’s title insurance industry. The industry disputed the study’s findings at hearings in August. In one of his final acts as insurance commissioner, Garamendi submitted his proposed rate reduction to the OAL on Jan. 5.
Poizner, a Republican who had never held elected office before running for insurance commissioner, said he was approached by title insurance companies after the election, who urged him to stop action on Garamedi’s proposed rate rollbacks. Poizner said Thursday that he took a “fresh look at market conditions” and the proposed rate rollback.
“After an intensive review of market conditions in the title insurance industry, and after discussions with industry representatives and independent experts, I have concluded that reasonable price competition does not exist for title and escrow services,” Poizner said.
Poizner said that while technology has lowered the costs of title searches and document production, title insurance on the average home in California costs roughly double what it did 10 years ago.
Insurance Department staff members, in a Nov. 27 report written in support of the proposed rate rollback, said that because title and escrow rates are tied to home prices, the industry made windfall profits during a period of rapid price appreciation.
The report noted that from 2000 to 2006, title insurance premiums increased by 160 percent, to $1,708 on average. The price of the average home covered by title insurance policies grew by 197 percent during the same period, to $542,683. But because only 5 percent of title insurance premiums are paid out as claims, premiums should not have risen so dramatically, the report said.
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