Grid151
Clint Casabella, senior vice president for strategy and business development at Grid151, highlights the potential for title reinsurance solutions to address gaps left by traditional title insurers in the captive insurance market
Grid151 has positioned itself as an innovator in the title insurance space. Could you talk more about how your quota share reinsurance programme for captives fills a gap that traditional title insurers may have missed?
Our reinsurance programme was designed to add value to both the broader title insurance market and captives simultaneously. For title insurers, utilising reinsurance to spread the risk on large transactions is not a new concept. The central question is not whether they will use reinsurance, but rather, with whom will they reinsure? Historically, traditional title insurers have primarily sought reinsurance from each other. In a perpetual daisy chain, title insurer 'A' reinsures title insurer 'B', who in turn reinsures title insurer 'C', and so on.
This paradigm presents considerable concentration risk, which is bad for both insureds and the insurers. We are introducing new and diverse reinsurance capital partners to the title insurance ecosystem through our programme, which we believe benefits both insureds and insurers. For the captives themselves, our reinsurance programme provides them with the chance to extend the use of their captive to a new category of business, allowing them to reap the same advantages and benefits typically associated with reinsuring more established traditional risks such as P&C, which have always been at the forefront of captive utilisation.
The really positive feedback from captive managers and consultants who have brought this programme to their clients continues to validate our thesis that the demand for title reinsurance from captives will only continue to grow going forward as real estate industry participants explore how to best optimise their overall insurance and risk financing strategies.
The title insurance industry has been dominated by a few large carriers for quite some time. How does Grid151's partnership with Westcor Land Title Insurance give you a competitive advantage when offering title reinsurance solutions to captives?
Westcor’s market position is unique, and that's one of the reasons we wanted to incubate and grow our programme in partnership with them.
It is a bit of an oversimplification, but in the landscape of title insurance carriers, there are basically three cohorts: (1) the four large, publicly traded carriers; (2) three to four medium-sized carriers; and (3) twenty or so very small carriers.
In the middle group, Westcor is one of the fastest-growing and most forward-thinking carriers. We have found them to be very entrepreneurial and creative.
On the one hand, we required a carrier partner with a great reputation, capable of establishing the necessary financial strength and stability to showcase their credibility and track record to rating agencies, law firms, and other players in the commercial real estate world.
But, on the other hand, we also needed a carrier who was willing to challenge the status quo and think outside of the box, a trait not typically associated with large carriers.
In Westcor, we have found both of these qualities and so much more, and our captive clients benefit from Westcor’s role as the fronting carrier in the programme structure.
What is behind the relatively low loss ratios in title insurance, and what does this unique risk profile mean for captive owners thinking about joining your reinsurance programme?
Captives will be most interested in low-severity risk, and if it can also be low-frequency, all the better. The low loss ratios of title insurance are a positive indicator that these characteristics are true of title risk, making it a positive fit for real estate-focused captive owners. Because title insurance is unique, we often cover a lot of educational ground on the front end with risk managers to help them understand the ‘why’ behind title insurance’s low loss ratios. Title insurance is substantially different from other lines of insurance because it emphasises risk elimination rather than risk assumption.
Whereas most insurance is a contract with the insurer indemnifying or guaranteeing the insured against a possible loss in the future, title insurance generally insures against losses caused by title problems that have their source in past events. Preemptively identifying the source of many potential losses, curing defects, and eliminating adverse interests prior to the issuance of the insurance policy leads to extremely low claims rates.
Thus, it functions more like a warranty because of the product's retrospective nature and exposure to claims. For captive owners, this means greater predictability and certainty in terms of the financial benefits of joining our title reinsurance programme.
Could you walk us through the actuarial and underwriting considerations that go into figuring out the right level of risk retention for a captive in your title reinsurance programme?
A collaborative process combining financial analysis, regulatory considerations, and strategic objective weighing determines the appropriate level of risk retention
Because captives are regulated entities, the jurisdiction in which they are domiciled will impose regulations regarding minimum capital, surplus requirements, and other restrictions that can impact risk retention.
For our programme, we consider factors such as the type of business, whether commercial or residential, and the estimated average liability amounts of the policies to issue.
The analysis also incorporates actuarial models, informed by industry benchmarks and historical loss data, which forecast potential future claims, risk exposures, and expected loss costs.
We will evaluate the captive's capital adequacy to cover potential losses, ensuring it can withstand its retained risks without jeopardising its solvency. The level of risk retention will also be influenced by the captive parent company's own tax considerations, cost-benefit analysis, risk diversification, and overall risk tolerance.
Grid151 recently launched a cell-captive solution. How is this option different from your traditional captive offering, and what types of organisations are best suited to each?
There is a waterfall of diagnostic questions which organisations can work through to understand whether or not they are a good candidate for our programme. We cannot delve into every question here, but the primary and crucial one is related to the amount of real estate activity that the parent company initiates.
Does the company’s real estate buying, selling, or financing activity create enough title insurance premiums to make implementing the programme worthwhile? Since title insurance operates on a transactional basis, the amount of premium available to run through the programme directly and exclusively correlates with the size and frequency of future real estate closings. There are thousands of companies that can answer ‘yes’ to this first question.
The second important question is, do they own a captive? This is where it gets a bit more complicated. What we have discovered is that the list of companies that can answer ‘yes’ to both questions, indicating that they have the required transactional volume and already own a captive, represents a significant underserved market. This discovery excites us, leading us to propose the traditional captive offering.
However, we have also discovered that there are many large institutional real estate industry participants who meet the eligibility standard for transactional activity and associated premium creation but are not yet captive owners. In order to also serve this segment of the market, we launched a cell captive solution to lower the barriers to entry and empower entities who do not currently own a captive to still reap the benefits of our title reinsurance programme.
Since title insurance tends to be more transactional than recurring, and the industry is closely linked to the real estate market, which can be quite cyclical, how do you help risk managers and CFOs see the long-term value of participating in your reinsurance programme?
The chief financial officers (CFOs) and risk managers we work with are already well versed in the nuances of the real estate market, such as its seasonality, cyclicality, and how even small changes in interest rates can have a dramatic impact on transactional volume and throughput. Instead of introducing new or unknown market challenges, our programme optimises the existing paradigm that institutional real estate industry participants are already accustomed to navigating as part of their core business strategy.
One concern might be that the collateral could become overcapitalised or undercapitalised in market boom or gloom times, respectively. However, we institute frequent and regular actuarial reviews to ensure the collateral is right-sized for the current market environment and resultant transactional flow. We have found that many of those same CFOs and risk managers who have fluency in the real estate market are relatively unfamiliar with title insurance. This is partly because title insurance has not traditionally been a coverage that is placed into captives, but more likely because the procurement and management of this unique line of insurance often live outside of the organisation’s risk management and finance teams.
While other types of insurance have renewals or built-in milestones that would warrant an annual review at the enterprise level, title insurance does not. Additionally, it's important to remember that title companies not only issue insurance policies but also collaborate closely with the parent company's operational teams to facilitate the successful completion of transactions by providing uninsured services.
The title company prepares crucial closing documents like deeds, affidavits, and settlement statements, acts as a neutral third party by holding earnest money, down payments, and disbursing funds, and coordinates closing tasks like distributing final documents, securing signatures, and acting as a liaison between buyers, sellers, lenders, and other parties. So, it is right that the parent company’s operational deal teams should be seated at the table when determining who the title company will be, and we always encourage their early inclusion in our feasibility and exploration conversations. Despite all other programme benefits, this has to work for the operational teams, who are in the weeds of transactions day in and day out.
We view these outsized role requirements as an opportunity to have an outsized impact. The long-term strategic nature and mutual commitment facilitate a relationship between client and vendor that is much more akin to a true partnership, bringing greater alignment to the benefit of all parties.
CFOs and risk managers are often our biggest allies and champions within the parent company, diplomatically and tactfully introducing our programme and its value to multiple different stakeholders across the enterprise.
Grid151 plays a unique role within the title insurance ecosystem. How does your position as a programme administrator for Westcor benefit captive owners, particularly when it comes to underwriting flexibility and operational efficiency?
Those two benefits, respectively, hint at the dual responsibilities of title companies for real estate transactions. These responsibilities include issuing an insurance policy and providing a separate but related bundle of uninsured services that surround the transaction, commonly referred to as ‘settlement’, ‘closing’ or ‘escrow’ in the vernacular of the real estate industry.
With respect to underwriting flexibility, Grid151’s reinsurance programme strengthens and further aligns the relationship between insured and insurer. Both the carrier and the captive bear the risk of potential claims and the resulting losses.
This reality predisposes both parties to more quickly and effectively reach consensus and like-mindedness through flexibility on underwriting decisions if complex and complicated coverage issues arise.
Returning to the uninsured services, Grid151 is not only the programme administrator for Westcor but also the party responsible for operational execution and handling the day-to-day of the real estate transactions running through the platform.
In this capacity, Grid151 brings not only efficiency to programme participant’s real estate transactions but also pairs boutique customer service with the size, stability, and resources of a large carrier.
Grid151 serves as a matchmaker, connecting real estate-focused captive owners to a carrier willing to cede risk without watering down the product quality or service levels.
In some real estate transactions, someone other than the insured might be responsible for paying the title insurance premium. How does this create opportunities for captives, and which types of parent companies could find this especially attractive?
Such situations present an opportunity for the financial benefit of our programme to shift from serving as a vehicle to reduce title insurance-related deal costs for the parent company to generating net new revenue.
Consider captives whose parents are banks, credit unions, or other financial institutions operating as mortgage lenders.
In refinance transactions, a loan policy protects the mortgage lender. In those transactions, however, the borrower bears the cost of the title insurance premium.
Because an entity other than the captive parent is paying the premium, this results in a new revenue stream for the captive.
Let us turn our attention to captives whose parents are frequent buyers or sellers of real estate.
There is an old adage in the real estate industry that ‘everything is negotiable’, and that holds true when it comes to who is responsible for paying for title insurance costs. That caveat aside, however, it is often customary for one of either the buyer or the seller to pay for the title insurance cost.
Occasionally, the buyer and seller split the cost equally. Depending on whether our client is the buyer or seller and what the local custom is for the state where the subject transaction closes, our client’s counterparty, rather than the captive parent itself, may be responsible for paying some or all of the title insurance premium.
For instance, if our client is the buyer of property in a jurisdiction where it is customary for the seller to pay for title insurance, our client can reinsure the premium that the seller has paid.
These examples are especially attractive because of their ability to create net new revenue for the captive.
The programme is demonstrating a variety of use cases and applications for real estate-focused captive owners across the spectrum of roles they might occupy in the real estate transactions themselves.
