Ask the Expert ft. Adrian Jones: Leveraging InsureTech in the Mortgage Industry

Thanks Max. I figured given that we're going to talk about insurtech, I would do away with the collared shirt and the sport coat, and I see that you are also appropriately, what passes as business casual in this remote environment. So don't worry Max, I've got a business suit and some very nice loafers underneath, they're well polished.

Yeah, there is some of that, but basically what we're talking about here is companies who recognize that insurance should cost less, be faster, be easier to buy, be more sophisticated in its pricing, and overall deliver a better consumer experience. Globally, there are at least a thousand companies you could call insurtech, depending on where you draw that line between incremental versus more revolutionary, and they've successfully obtained more than $25 billion in funding since 2015. So enormous amounts of money have come into this industry. As an example, you can go to a website like myhippo.com or ourbranch.com and you can get home or auto, or sometimes both, in a matter of two minutes. So it's no longer 15 minutes can save you 15 percent, it's two minutes. And I think that is having implications all across every different type of insurance. There's no area that's untouched, and certainly title is one of them.

Well, I think it depends a lot on what type of incumbent you're talking about and who specifically it is. The thing about insurance is that there is an enormous gap between the best performers and the worst performers. The best performers, there are more than 500 insurance companies in the US, so you only need 10 or 20 percent to be quite good, and they will really define the industry. And I think that's in fact what you've seen. So there are incumbents who are very much embracing what's going on in insurance technology, and there are certainly others who for various reasons have lagged. And it's not always the ones that you expect. But we do find that there are certainly a large group of insurers who are very pleased with the business that they have built, and they see that business going on for quite some time, and frankly are just not worried about anyone disrupting it because nobody has been able to do so so far. But this is learning that happened before venture capital discovered insurance and before public markets showed that they really highly value these insurtech challengers. And I think that collectively there is much more brain power and much more capital focused on the insurance business than there has been in at least 20 to 30 years. I don't go back any further than that. But I think that is collectively making a change, and some incumbents are leading that change, and some are not.

Yeah, I mean companies that Americans are familiar with. You take Progressive, for example, has continued to gain market share year after year, a very technology-first driven company. They actually introduced telematics devices in the United States, so it's a device either in your car or on your phone that measures the quality of your driving and uses that to determine a price for insurance. Progressive started doing that almost 10 years ago now. You look around the world and you see challengers in every market who are actually doing a really good job advancing technology, but they're not uniformly distributed and you don't see them in every line of insurance.

Yeah, so I think a lot of it starts with segmentation and understanding what customer segment you're actually going for, because that's what drives the appropriate measures. So in personal lines, for example, there is a segment of consumers who just shops for price all the time, and half of those customers who switch switch for a savings of less than 10 percent. Now, there's one well-known insurtech who, in my estimate, needs to raise their price probably by 50 to 60 percent in order to break even. So we're not going to mention their name here. I won't name any names, but this is my personal opinion having studied their numbers. The point is, if you sell insurance for half off, then absolutely you're going to get customers very quickly. But if you want to build a sustainable business, you have to deliver a great product with a great customer experience while charging a price that earns you a profit.

Profit.

In a few years we'll get there, right? No, but look at the business that you've built, Max. You're using a standard ALTA product that everybody expects. Customers are closing their loans days and even weeks faster, they're raising their pull-through rates, they're simplifying their operations. And this is not because States Title is underpricing its product, it's because it's delivering a better customer experience. And that, I think, is the true measure of a long-term sustainable insurtech.

Yeah, so let's come back to mortgage markets because I think the role of reinsurers in mortgage markets is much greater than probably most mortgage professionals understand. But let me step back and just what is reinsurance? It's an industry most people have never heard of, but it's exactly what you would think: it's insurance for insurance companies. And nearly all insurance in the world is reinsured at least to some degree. So as a reinsurer, we deal with almost every notable insurer around the world, and we see essentially every form of risk, and we're constantly assessing that risk with our clients, trying to understand it both quantitatively and qualitatively, and ultimately we assume a lot of that risk. Globally, this is a $500 billion industry in terms of capital, and there are about 60 major reinsurers. So the largest are Munich Re, Swiss Re, Hannover Re, Scor, Berkshire Hathaway, and Lloyd's of London. It's a long, stable industry. We are actually the youngest, and we are 50 years old this year. So reinsurers, I think, have been very much at the forefront of a lot of the innovation that's been seen in the insurance world lately. This year alone, more than a billion dollars will be ceded into the reinsurance markets by insurtech companies. And so as a reinsurer, we stand behind those companies to say this is not just a young startup, this is a young startup that has an A-plus rating standing behind it from a 50-year-old company with a $50 billion balance sheet, and we ensure that those policies are going to get paid no matter what. So that's our role in a very basic way. But more broadly, we have to come in, assess the risk, understand the risk, understand where it can go wrong, and partner with companies like States Title that they take that risk in an appropriate, intelligent way such that ultimately the product that they produce is better for everyone involved. So that's the basic role of reinsurers. You want to talk about the mortgage market specifically?

Yeah, so as I said, I think the role of reinsurers in mortgage is not fully appreciated by many people, but actually the global reinsurance market has an important role. Reinsurers were critical in getting the PMI market, private mortgage insurance, back up and running in 2009. So reinsurers backed the startup Essent, which I think is the number three PMI now, and actually the number one PMI is Arch, which is a Bermuda company, a Bermuda reinsurer as a matter of fact. And today there's over $1.2 trillion of private mortgage in force, it's about as much as the FHA covers. So reinsurers are critical in the PMI market. They're also critical in the credit market, believe it or not. So in the early 2010s, Fannie and Freddie started ceding large amounts of business into the global reinsurance markets. So Fannie it was the Credit Insurance Risk Transfer program, which has reinsured about a half trillion dollars of unpaid principal balance, and Freddie similarly several hundred million through ACIS and STACR. So the data are not entirely easy to come by, but overall we probably are touching essentially every mortgage in the country in some way, unless the government is taking the risk and retaining it. And this is just credit risk, but then also remember of course you've got homeowners insurance, so the protection of the collateral, we could talk about that in a minute, and there's all the insurances that mortgage professionals are buying like errors and omissions, fidelity, crime, etc. So it touches the mortgage market in a lot of ways.

Yeah, so I think, and I'm going to draw upon my experience having bought a house within the last month. I think title insurance is a very obvious place where innovation has been needed because of the oligopoly that exists in that market and the lack of focus on the customer there and making the customer's life as easy as possible. The issue in my home buying process though is actually the appraisal. The appraisal was delayed by two weeks, in fact the appraisal delayed the closing by two weeks, why? Because of a wildfire an hour away from the house. And so ultimately I ended up with two appraisals, and I got back these nice thick documents here, which at the end of the day told me a number which is exactly the same, or within a few thousand dollars, of what Zillow had already told me. And I paid a thousand dollars for each of these appraisals. And by the way, then what was even more amazing is after I was forwarded the appraisals, I started reading through it and there was a team at the bank who had gone through all the fine print of the appraisal and said, 'Well how come you didn't adjust for the lot size? Because his lot is this size and the comparable lot size was that size.' And the appraiser wrote back, 'Why?' And I just thought, 'Oh my gosh, we're putting so much effort into something that really ought to be automated.' And maybe there's an insurance solution that exists for this for those who are concerned about using an automated appraisal. And of course there are a lot of automated appraisals already being used, but it just seemed like a tremendous amount of work to tell me what Zillow could already tell me. And so it just felt like this is an area where the priorities are out of order, because at the same time I was getting my homeowners insurance and it seemed there that it was okay, whatever number we came up with for the value of the structure is what was insured for, and that was acceptable. And I think that there is a lot of risk there that mortgage companies are running that they're not paying attention to.

I'd love to, and in theory the answer is yes. You could indemnify the mortgage holder against any risk to the collateral, no matter how that risk came about, so that you have collateral risk and you have credit risk. But in practice, we crack open the California Insurance Code, we read the first line under title insurance, and it defines what title insurance is. The second line then says the business of title insurance shall be conducted only by title insurers. And so this is where folks like Radiant, Lien Protection got shut down 20 years ago, because the government said, 'Well, you're doing title insurance but you're not a title insurer.' So to actually merge all of this sort of risk is something which goes against the very foundational principles of the way that insurance has been designed. I think it would be great to work hand in hand with regulators and state legislators to think about ways you can reduce the barriers to homeownership, make homeownership simpler, faster, more affordable, while also providing better protection against the collateral for mortgage holders. But you have to actually rebuild the entire regulatory framework to do that.

My understanding is that it actually dates back to the Great Depression, when you had a number of insurance companies who failed for various reasons, and so the idea was to separate out financial guarantee business from everything else. Does that make sense? Not necessarily, because the whole point of insurance is that you pool all sorts of different types of risk, that's what we do as a reinsurance company. So it's a little bit like the other favorite Depression-era change, which is the three-tiered liquor distribution system, which is why you can't buy direct from a lot of wineries if you're here in New York. So if maybe we can eliminate both of those systems, then ultimately it would be better for consumers.

Yeah, and I think what's relevant for mortgage professionals in particular is this. Well, several things. Obviously there has been a huge demand for new homes, for homes that are more spacious, that are further away, and that's driving a lot of what you're seeing in the mortgage world. At the same time, that is also driving a lot of innovation in the insurance world. So for example, oftentimes insurers would send someone out to actually visit and inspect the home and make sure that it was not about to fall apart and there wasn't some big unknown hazard. A lot of that's been eliminated, and so now a number of companies will actually pay you if you do your own inspection by holding up the phone and taking it around, and they have AI-driven ways of recognizing what's actually in the home and recognizing whether perhaps they do need to send a human inspector. On the claims side, I recently saw a claim of a townhouse that had burned, and the claim was entirely managed to do a Matterport tour, just like a lot of real estate agents are doing. And I think Matterport is just a fabulous technology, but just as you're using it in real estate, we're using it in insurance to better settle and manage claims. But I think in general, any point at which there's an interaction physically between anyone from the insurer and any customer is a big focus area right now to get that automated.

Oh man, I mean I can't. Look, I don't know if I can speak to the risk piece, I'd ask you to comment on that. But I do think that we are in for, suffice to say, we're in for a very different landscape when the rolling forbearances come to an end, and one that quite frankly I don't know that we have a historical precedent to point to to tell us what it's exactly going to look like. So I'd love your perspective on that.

I'll tell you what a lot of our friends overseas think is the strangest risk they've ever seen: it's title. They have no idea why we in America have a $20 billion title insurance industry, because it largely doesn't exist in most other parts of the world, because they have a working land registry. By the way. Yeah, yeah, it all comes down to that. So, you know, we do a lot of really esoteric stuff. Everybody talks about Madonna had her legs insured at Lloyd's or something like that, I don't know if that's apocryphal or not. We do a lot of specialty stuff. We've got a company that we back that gives trade credit insurance to the off-takers of solar installations. And if we had another half hour I could explain what that means, but it actually is very helpful for helping solar installations get built and financed, and so it's an important part of the energy transition. But it's a trade credit insurance product. So there's a lot of weird stuff like that, but we actually love it. And I'll tell you one little story. I say this a lot: I compare the French and English. The French and English have been at each other's necks for more than a thousand years. And so when the French go on vacation, they go to places like Ghana and Uzbekistan, far-flung locations. When the British go on vacation, they go to the south of Spain. And so we think about risk the same way. We are looking for the Ghanas and Uzbekistans of the world, not the south of Spain. And we tend to find them interesting.

Well, I would have done what Max did, but Max got there first. Now, I genuinely do think that the biggest opportunity right now is in title. It is a market which I think everybody in the industry wants to see innovate. I think States is very much at the forefront of that. So frankly, that's what I do. And if not title, then I'd probably do something around the appraisal process, because all of these are frictions that create difficulties and add costs to home buyers at a time when they're already under a tremendous amount of stress. So let's just eliminate all of those frictions, and I think ultimately that is the best thing that could be done for the real estate business.

Thanks Max.