The title insurance industry has shown a modestly declining Risk Adjusted Capital (RAC) ratio in 2005, according to a new study from Fitch Ratings.
Relative stability came as surplus growth was balanced against greater capital requirements. “The decline in title revenue to date in 2006 has been expected and will lead to more modest surplus growth in the near future than experienced over the past five years,” the report noted.
The decrease in the RAC ratio reflects growth in several of the risk components of Fitch’s model, particularly related to expense leverage, potential adverse claims development and large policy loss exposures.
The record-setting operating revenue generated by the title insurance industry in 2005 increased the expense leverage charge in Fitch’s RAC ratio, reflecting the risk of higher fixed costs in a historically cyclical industry.
“Surplus growth in 2005 was solid but did not fully compensate for the greater risk factors,” Fitch analyst Doug Pawlowski told the National Underwriter.
The study’s results revealed that the title industry remains well capitalized overall, although significant disparities in capital strength among individual companies remain.
Based on developments to date in 2006, namely declining operating revenue, Mr. Pawlowski said the RAC ratio is likely to improve.
“Specifically, even though operating results are expected to trend downward, surplus is forecast to increase during 2006,” he said.
Further, declining revenue will reduce the charge for expense leverage, meaning a higher RAC ratio.