Capitol Hall Report – June 30, 2016 – Title Insurance and the Free Market

Title Insurance and the Free Market

Competition is always good for consumers but in Texas the highly regulated Title Insurance business is stifling competition. Free market competition was a key element in making America great. America was founded on competition.

When a marketplace is allowed to be a free market, our economy thrives.  So why then is one of the largest industries in our state more regulated than Obama Care?  It seems that yet another bastion of capital cronyism is alive and well in the state of Texas: the title insurance industry.  The more I look into the matter the more I realize that the Title Insurance Industry is the last bastion of industry protectionism in Texas.

When it comes to purchasing Title Insurance, you would think that competition in the market place is a bad thing.  Did you know that Texas has the most heavily regulated Title Insurance market in the country? Unlike most states, Texas eliminates any competition by setting a fixed rate for Title Insurance.  By requiring the purchase of comprehensive, one-size-fits-all Title Insurance policies at a fixed rate, the costs for both consumers and businesses increases. In fact, commercial Title Insurance rates in Texas are often significantly more expensive than in other states and could negatively impact the relocation and expansion of businesses in Texas.  Texas’ regulatory scheme is so restrictive that it eliminates any competition.

A free market economy is better for Texas because it provides the best possible product for the consumer at the best price.  Winners and losers are chosen, not by the government, but by market participants based on consumer demand.  In a competitive market, a poor or overpriced product will be pushed out because consumers will find a better source for the commodities they seek.

Conversely, Texas’ existing high cost, low-choice regulatory regime requires every home buyer to purchase Title Insurance and sets the price and coverage of Title Insurance policies.  In fact, Texas law states that the Title Insurance regulatory system is designed “to completely regulate the business of Title Insurance on real property.” By requiring the purchase of comprehensive, one-size-fits-all Title Insurance policies at a fixed rate, Texas increases costs for both consumers and businesses. The over-regulation of Title Insurance is far removed from the Texas Model of lower taxes and spending and less regulation.  The state promulgates rates, the types of coverage, andeven the division of premiums between the title company and agent.  The bottom line is that because of the current regulatory scheme consumers cannot shop for the best deals on Title Insurance.

The Title Insurance lobby will tell you that these stringent regulations protect our property rights.  I am a strong proponent of property rights being protected.  However, it is interesting to me that the way the Title Insurance lobby wants to protect our property rights is to have complete control over the price and coverage of Title Insurance.

All across the country people buy and sell homes, farms, businesses,and other types of property in states with far less regulation of and lower prices for Title Insurance in those states, title defects have not been a problem and the people’s property rights are protected.

What is interesting about this whole industry is that you would think the high premium cost would be the result of title companies absorbing a great deal of lose.  Nothing could be further from the truth.   Title Insurance is naturally a low claims product. Casualty insurance guards against future risk: Title Insurance defends against events that occurred in the distant past. Nationally, the losses to premiums ratio and claims rates are much lower than other insurance products like homeowners insurance.  A study by the LBJ School of Public Affairs (2011) found “when a state promulgates rates [like Texas does], the cost of Title Insurance will on average be significantly higher than the title prices where states use other regulation styles.”  In fact, Texas has the highest Title Insurance rates for a $200,000 home among states that require comprehensive coverage.

91% of Texans want consumer choice in the Title Insurance market.  Texans can shop around for automobile and home insurance, why is TDI and the legislature stopping them from shopping around for the best deals on Title Insurance.  Reforming Title Insurance regulation in Texas by moving to a system similar to the one used for our homeowners insurance, called a file-and-use system,  would open up the Title Insurance business to competition, resulting in more choices for consumers as well as lower prices.

Reducing the high price of commercial Title Insurance in Texas would naturally lower the cost of doing business and would result in a stronger economy and more jobs. Therefore, I and several of my colleagues plan to sponsor legislation in 2017 to help boost the Texas economy by deregulating Title Insurance.