Post-pandemic forecast for title insurance is pessimistic
A study into the consequences of the global pandemic on the title insurance industry shows long-term losses are a likely outcome.
The report, which was carried out by the US-based strategy and management consulting firm , examines the trends in loss adjustment and the historical data relating to seismic financial crisis. It focusses on the major impact on the property market, interest rates, crisis loans and how this is likely to impact the title insurance industry.
Dana Ryan, report author and senior consultant for Oliver Wyman, states, “Within the world of hazard insurance, premium rates and loss experience of P&C insurance coverages, have always been highly correlated with economic activity. This is especially the case with title insurance, where loss experience is highly correlated with the real estate market and the general economy.”
She continues; “The current situation, however, is somewhat unique. Millions of homeowners are at risk of default on their mortgages due to job losses, while at the same time millions of others are either purchasing new homes or refinancing current mortgages to take advantage of extraordinarily low-interest rates.”
Ryan’s examination of the title insurance market looks at the indicators which impacted the market before the pandemic hit, noting that after the 2008 global financial crash, claims against policies increased. She points out that title insurance policies are long-term arrangements, often taken out decades earlier, and can be claimed against until the policy ends, which makes them a vulnerable sector in the event of a disaster.
Since the insurance industry in general is suffering losses, Ryan predicts a rocky future for the title insurance sector – but remarks that smaller operators will probably fair better than the corporate giants.
The report data examines data between 1994 and 2019 – and does not yet show the impact of the current economic downturn. However, Ryan believes the declined GDP, rising unemployment rates, a sluggish stock market and the possibilities of further, worldwide shutdowns will increase the strain on the title industry.
She says; “Given the current state of the economy and this unprecedented pandemic, it is important to ask questions about the future of title insurance. What will happen to frequency and severity in the next few years? How will the loss ratios look for the most recent policy years as they continue to mature, and how will they look for the upcoming few policy years?”
She points out that refinanced loans have increased, stimulated by low-interest rate. But that this could help the title insurance sector recover – but it won’t be a long-term solution.
“Since refinance loans are less risky in title insurance, it stands to reason the loss ratio for the 2020 policy year will be low, all else being equal. But what can be expected in 2021, 2022 and later? What will happen when interest rates start to rise again and therefore refinance loans will start to decrease? Interest rates cannot be expected to remain this low forever. Even if interest rates continue to decline through 2021, they are likely to eventually turn again.”
Chance of recovery
However, Ryan believes the discovery of a vaccine could well save the global economy and the mortgage market because it would enable interest rates to rise again. The report also shows that the survival of 30-year mortgages will be reliant on solutions found to combat COVID-19.
Furthermore, regardless of the economy, there’s no better substitute for preparedness, and Ryan urges title insurers and their actuaries to be cautious and continue to monitor the economic situation and real estate trends at the end of 2020, choosing carried and new, indicated reserves.
She adds; “Many people are eagerly waiting for 2021 to begin. 2020 will have lasting impacts in the future. While we are all enthusiastic to ring in the new year, we must be cautious about the long-term effects of the pandemic on the economy. Title insurance companies must be aware of both economic and real estate trends during these uncertain times and understand how these indices have impacted frequency, severity and losses historically to make educated decisions about the future.”