Property title insurance in the offing

Bajaj Allianz, ICICI Lombard in talks with American company to launch the product.

Property transactions in India will soon have an insurance cover to fall back in case something goes wrong in the deal. The country's two large private sector insurers, ICICI Lombard General Insurance and Bajaj Allianz General, are planning to launch title insurance covers this year.

Title insurance is a cover that protects a potential owner of a property against loss from defects in title. The policy is a retrospective one, where the insured is protected against losses arising from the events that occurred prior to the date of issuing the policy. Globally, the policy is bought by investors, occupiers and financiers.

At present, none of the property transactions, be it large acquisitions or a simple sale of a land or a flat, is covered through an insurance policy by an Indian insurer.

The reason is that Indian insurance companies do not have the underwriting expertise to offer title insurance products. Indian insurers require reinsurance support to be able to offer the product.

Both Bajaj Allianz and ICICI Lombard are in talks with First American Title Insurance Company (FATIC), which will be offering reinsurance support for Indian insurers to offer the product.

FATIC is the largest title insurer globally, with a revenue of $8.4 billion in 2006.

Says Swaraj Krishnan, CEO, Bajaj Allianz General Insurance, "We have had a preliminary discussion with First American Title Insurance. We have asked them to give us the product details. We will be doing a market study, verifying the titles and will file the product with the regulator in the coming months."

The value of the title insurance cover will be equal to the price of land that has to be acquired. The premium rates will be a function of the value of property, the nature of transaction, which means the size of the purchase, the past history of the real estate property, costs relating to title search and the legalities involved in the title search.

Howden Insurance Brokers is also in talks with real estate developers, financial institutions, law firms, insurance companies and reinsurers to culminate into the next few insurance policies being sold.

Says Anoop Mathur, vice-president of Howden Insurance Brokers, "The value at risk has grown proportionally as the land cost has increased for the real estate developers. Title insurance makes a project bankable and saleable to customers."

According to Akshaya Kumar, chairman, Park Lane Property Advisors, consultants during due diligence discover 20-30 per cent cases have title defects in them.

Property consultants believe that the availability of title insurance products will boost private equity investment in Indian real estate since most of the institutions are very particular about clear titles.

According to accounting and business consultancy firm Grant Thornton India, private equity firms have invested nearly Rs 25,000 crore in Indian real estate and infrastructure in 2007and, according to industry estimates, the investments are set to grow in the coming year.

"Institutions do not buy even if they have the slightest doubt about the titles. More private equity funds will flow in the Indian real estate if title insurance products are available in the country," says Anuj Puri, chairman, Jones Lang LaSalle Meghraj, an international property consultant.

Adds Anshuman Magazine, managing director, CB Richard Ellis, South Asia: "Title insurance products give a lot of comfort to international investors to invest their funds in the property markets of developing markets such as India. Since these investors do not invest directly and do joint ventures with Indian developers, the local partners will take care of title issues. But we have also seen foreign investors demanding these products before signing the agreements to develop properties."

According to Mathur of Howden Insurance Brokers, the two Bills "" Land Acquisition Amendment Bill, which has been introduced last month in the Lok Sabha, and the Resettlement and Rehabilitation Bill "" will make corporates acquiring land for SEZ or other reasons buy title insurance covers.

Explains Mathur, "After the amendement of the Land Acquisition Act, 1984, the government will not be able to acquire land and make it available for companies. As a result, corporates will have to acquire the land directly from land owners at a higher price. In such a scenario, title insurance would protect project developers from any financial loss arising from any defects in title to real property."

There are two types of title insurance policies: the owners' policy and the lenders' policy. Owners' title insurance is bought by a buyer of the property. It protects the buyer from all loss or defects in a title.

On the other hand, the lenders' title insurance is bought by lenders such as banks and financial institutions. Experience in other global markets is that all institutional lenders require title insurance to protect their interests in the collateral of loans secured in real estate.

The policy amount decreases each year in proportion to the loan paid off each year. The policy has a provision for defence cost if a title to the real property is challenged in a court of law up to the actual amount of indemnity provided under the policy.

Land records in the country are not computerised and are not easily accessible.

The deeds registration system is not guaranteed by the state government and is inconclusive; typically leaving buyers with 30 years of title deeds to assess. Besides, the level of fraud in Indian real estate transactions is very significant; and the legal process is slow.

According to insurance officials, four to five foreign title insurance companies are keen to do business in India on this product. They may set up a dedicated company in India or could provide reinsurance support to Indian insurers to offer the policy for this line of business.