South Carolina unnecessarily regulates the relationship between title insurance agencies and their underwriters. A recently filed state House bill would embrace the free-market system and allow the two parties to negotiate commission payments on their own terms.
Title insurance is a way to protect yourself from financial loss and related legal expenses in the event there is a defect in the title on your home or other real estate. Title insurance differs from other types of insurance in that it focuses on risk prevention, rather than risk assumption. With title insurance, title examiners review the history of your property and seek to eliminate title issues before the purchase occurs. Title insurance also differs in that it comes with no monthly payment; homeowners instead pay a one-time premium at closing.
South Carolina is one of just two states that imposes a cap on the commission paid to a title examiner (agent) when someone buys title insurance.
The normal split in most states is roughly 70-80% (agent) and 30-20% (insurer). However, South Carolina law caps the split for agents at 60%. Note that agents do most of the work in this process and are responsible for researching title claims, which can be especially time-consuming. Agents dramatically reduce the risk assumed by underwriting insurance companies, and often agents are required to indemnify the insurance company for some losses sustained.
Background
The General Assembly in 1988 passed a broad bill regulating the title insurance business, which established the 60% cap on commission a title agent may earn, among other regulatory rules. The bill history indicates it was fast-tracked through the Legislature, bypassing both the House and Senate committee process. As legislative votes were not recorded at the time, it is impossible to know by what margin the bill passed.
There is no clear legal or moral justification for this law, which puts the government in the position of picking winners and losers. It is a system that works against South Carolina’s hardworking professionals and favors large, out-of-state multinational corporations.
H.3830, filed in January, would remove the cap and place South Carolina among the 47 states that use a free-market approach instead of an arbitrary standard. A similar proposal was filed in 2021.
South Carolina should embrace the free market
South Carolina is one of only three states nationwide to reject the free negotiation of title insurance commission in favor of a regulatory cap or minimum. Under this system, South Carolina agents have among the worst commission splits in the United States.
South Carolina agents perform all the substantive functions that give rise to a title policy: title examination, title review, curing title defects, certifying title, drafting the title commitment, and actually issuing the title policy. Research indicates that South Carolina consumers are well served by these agents, as the state had one of the lowest claims rates (2.4%) in 2020. Removing the regulatory cap would provide agencies with more resources to hire and retain talent and provide even higher-quality services to consumers.
To be clear, the Policy Council can’t possibly know what the proper “split” is between agents and insurance underwriting companies, nor can the state of South Carolina. That’s why in almost every other state, the two parties negotiate the term of their own agreements without the involvement of the government, as it should be.
What we do know, however, is there is no clear evidence from the other 47 states that South Carolina consumers will face higher rates because of this change. In fact, we contend the opposite.
Premium rates derive from a complex list of factors, with commission splits having no meaningful impact on the final figure. Insurance companies are free to negotiate the best splits they can, and they can decline to offer policies if they are unhappy with the terms. There is certainly no indication that these companies refuse to do business in states with a free-market approach.
Moreover, South Carolina’s premium rates are regulated by the S.C. Department of Insurance (DOI). Underwriters are not able to raise rates without DOI approval, a process that includes an analysis of claims rates and national premiums, among other factors.
The 60% regulatory cap is unjustified and unneeded. H.3830 is a worthy piece of legislation that warrants consideration.
Note: There appears to be a minor error in the current version of the bill, which as written, would actually prohibit a commission from being paid. The word “not” should be struck, as is done here.