Colorado probe of title insurers could have significant impact on sector: Fitch

News that the Colorado Insurance Department may sanction nine unnamed title insurers for allegedly paying kickbacks to homebuilders could have far-reaching implications for the entire title insurance industry, says Fitch Ratings.
The rating agencies says it believes that along with Colorado, Washington and California are also investigating title insurers’ reinsurance arrangements with settlement producers, i.e., people, like homebuilders, who are in a position to influence the selection of a title insurer. “In these reinsurance arrangements, a title insurer cedes a portion of title insurance premiums to a captive reinsurer that is at least partially owned by the settlement producer who is the source of the business.”
The rater says investigators are likely looking at whether there is any true risk transfer involved in these transactions, and whether the reinsurance premiums paid to the captive are in excess of market rates based on the risk being assumed.
Most states ban the payment of “referral fees” for obtaining title insurance whether a captive reinsurance program is admissible or not will depend on such things as whether the payment is in exchange for actual services, and the payment is bona fide compensation that does not exceed the value of the service provided.
Fitch says the outcome of these investigations could change the way title insurers operate, specifically with regards to compensation, and suggests “prudent” title insurers will already be reviewing their practices to avoid even the appearance of conflict of interest. The rater suggests the investigations are more likely to result in sanctions or fines, rather than criminal charges.