Startups Are Poised To Disrupt The $14B Title Insurance Industry
Originally published in TechCrunch on June 29, 2020.
If you have bought a house in the last decade, you likely started the process online. Perhaps you browsed for your future dream home on a website like Zillow or Realtor, and you may have been surprised by how quickly things moved from seeing a property to making an offer.
When you reached the closing stage, however, things slowed to a crawl. Some of those roadblocks were anticipated, such as the process of getting a mortgage, but one likely wasn’t: the tedious and time-consuming process of obtaining title insurance — that is, insurance that protects your claim to home ownership should any claims arise against it after sale.
For a product that is all but required to purchase a home, title insurance isn’t something many people know about until they have to pay for it and then wait up to two months to get.
Now, finally, a handful of startups are taking on the title insurance industry, hoping to make the process of buying a policy easier, cheaper and more transparent. These startups, including Spruce, States Title, JetClosing, Qualia, Modus and Endpoint, enable part or all of the title insurance buying process. Whether these startups can finally topple the title insurance monopoly remains to be seen, but they are already causing cracks in the system.
To that end, we’ve outlined what’s broken about today’s title industry; recent developments in technology and government that are priming the industry for change; and a synthesis of some key trends we’ve observed in the space, as entrepreneurs begin to capitalize on a tipping point in a century-old, $14 billion business.
Title Insurance 101
To understand how startups are beginning to challenge title insurance incumbents, we need to first understand what title insurance is and what title companies do.
Title insurance is unique from other types of insurance, which require ongoing payments and protect a buyer against future incidents. Instead, title insurance is a one-time payment that protects a buyer from what has already happened — namely errors in the public record, liens against the property, claims of inheritance and fraud. When you buy a home, title insurance companies research your property’s history, contained in public archives, to make sure no such claims are attached to it, then correct any issues before granting a title insurance policy.
In another deviation from insurance product norms, the cost for title insurance is linked to the home’s value, as opposed to being priced according to the risk of a claim. In the rare case that an unforeseen claim does arise, a title insurance policy will help protect the buyer’s right of possession and shield them financially from the consequences of a dispute.
There are two types of title insurance policies: a lender’s policy and an owner’s policy. A lender’s policy, as its name suggests, is required to protect the lender in the event the seller was not legally able to transfer the title of ownership rights. A lender’s policy only protects the lender, not the homeowner, against loss and lasts for the duration of the mortgage. By contrast, an owner’s policy protects the homeowner against defects in title and lasts for the duration of ownership.
Several entities are involved in the insurance process, some of whom a buyer will interact with during the closing process. One is an insurance agent, to whom a realtor often refers a buyer after their offer was accepted. The agent does the hands-on work of assessing the risk of a policy by researching a title’s history. The other is an underwriter, or the insurance company, which assumes the risk of a claim. An insurance company may have some type of financial investment in the agent through a joint venture or affiliated business arrangement (an “Affiliated Agent”), may leverage an independent agency (a “Non-Affiliated Agent”), or may sell directly to the homeowner (“Direct”). In 2018, 62% of total written premiums went through non-affiliated agencies.
A monopolistic bottleneck
The title insurance process today is incredibly slow and exceedingly expensive. This is largely due to the low-tech nature of the industry, which requires title agents to spend an inordinate amount of time researching a title’s history with tools not much more advanced than they were decades ago. This means a buyer can expect to wait 30–60 days to close on a house, all for an insurance policy that is unlikely to ever be used. On top of that, the underwriting process is inefficient: A house that has been bought and sold several times over the course of decades — and has had its title vetted each time — will undergo the same vetting process the first time as it does the fifth.
Title insurance is also expensive, with the cost of title insurance varying as a result of nonstandardized regulation among states. While states such as Florida, New Mexico and Texas have “promulgated rates” that require all companies to charge the same rate for title insurance, other states such as New York, Nevada and Oregon dictate a “prior approval” fee model requiring insurers to present new rate proposals on an annual basis, subject to state approval.
On average, a title policy will cost roughly 0.5%-1% of the home purchase price, or about $1,400. Although this may not seem like much given the duration of protection it buys, consider the fact that title insurers only pay around 3%-4% of their premium dollars on claims (compared to home insurance and car insurance companies, which can pay upward of 80%). In other words, very few buyers will ever actually benefit from the title insurance they buy, while the biggest companies dominating the U.S. market — Fidelity, First American, Old Republic and Stewart — profit immensely. With control of over 85% of the market, these companies have the resources to adopt technology that would expedite the diligence process, but minimal competitive pressure to do so, and zero incentive to pass any resultant cost savings onto customers.
New laws pave way for startups
Recent changes in legislation and technology have made the industry ripe for disruption. For years, state and federal governments have protected the interests of large title companies, even as concerns have been raised by the federal government about troubling aspects of the business, including a lack of price transparency and conflicts of interest among sellers. But only recently have regulations been implemented that give digital title agency providers a foot in the door of the market. New York upheld a 2018 law banning title companies from wining and dining clients and real estate affiliates. Other states are making allowances for important components of the underwriting process, such as remote notarization, to be performed virtually. And last fall, Fidelity was forced to call off a $1.2 billion merger with Stewart after the Federal Trade Commission withheld approval of the deal.
In a very short period of time, we’ve seen startups take advantage of this new, more competitive landscape by offering solutions to streamline the task of getting title insurance. Qualia, for example, offers an end-to-end platform that connects all parties involved in a real estate transaction, so title agents can manage and coordinate all aspects of the process in real time. San Francisco-based States Title, for example, uses a predictive underwriting engine that produces nearly instantaneous title assessment, dramatically reducing the cost and time required to issue a policy. Qualia and States Title are among several companies hoping to revolutionize title insurance and they reflect the two emerging meta-trends.
The first trend, enablement, consists of companies developing technology designed to integrate with incumbent real estate businesses. This includes:
- Companies enabling the title agent by offering technology for workflow management (Qualia).
- Companies enabling the realtor by allowing incumbent realtors to offer title insurance through JVs/Partnerships (Modus).
- Companies enabling the underwriter by offering underwriters a technology-forward solution that enables them to remain competitive in a quickly evolving market (Endpoint).
The second trend, disruption, consists of companies displacing incumbent real estate business altogether. This includes:
- Virtual insurance companies such as States Title, which are reinventing the underwriting process.
- Virtual title agencies such as Jet Closing, which displace traditional agencies through offering an efficient, tech-driven title/closing experience.
- Integrated residential brokerage platforms such as Flyhomes, Knock and Orchard that are building end-to-end platforms that span the homebuyer’s entire journey. These integrated platforms generate revenue by rolling secondary offerings such as title insurance into the sale process. Once deciding to expand into title, these brokerages can decide whether to leverage a “title agency in a box” offering such as Spruce or to build the capability in-house.
Entrepreneurs see huge market potential
What all of these startups share in common are products or services that deliver increased efficiency, lower costs and greater transparency to homebuyers who, until recently, have had no choice but to hobble blind through a long and often confusing closing process. When a market is antiquated, monopolistic, expensive and opaque, entrepreneurs see an opportunity for change.
Toppling the title insurance industry certainly won’t be easy. Title insurance companies, which have deep-rooted relationships with real estate professionals, mortgage brokers and other parties in the home-buying ecosystem, have long held the keys to the kingdom and will do whatever it takes to keep interlopers from entering their closed guilds. However, there is hope that startups will begin to dismantle the title insurance industry, as they’ve already done in other parts of the real estate market. Recent social distancing directives may accelerate the progress of title insurance startups, since home-buying took another big leap into the digital world with mandated virtual tours and fully digital closings.
It’s only a matter of time before buying a house becomes a fully digital process and visiting a title insurance company to read through and sign hundreds of pages of paper will soon feel like a relic of the past. At Bain Capital Ventures, we remain impressed by the strides a handful of intrepid entrepreneurs have already made in an industry that has for decades been insulated from market forces and look forward to the next wave of innovators taking on the title insurance titans.
