Title Insurance Market Estimation

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Autonomous Research has estimated the Title Insurance industry at $13 billion in the US alone. Title insurance covers the loss of ownership interest of a property from defects in title to real property and is a necessity if a property is mortgaged. We found a notable dip in revenues following the financial crisis, with revenues dropping from $14.2 to $10 billion from 2007 to 2008. Growth rate following the crisis has been sluggish, rising only from its lowest revenue of $9.4 billion in 2009 to the $13 billion in 2015.

The overall market revenue is defined by the following segments: (1) revenues gained directly and (2) revenues gained through agents. Findings show that the revenues were predominately gained through agents, who contributed to 60% of all revenues.

Fund Pricing Trends and ETF Selection by Roboadvisors

The first graph details how fund prices for equity and bond funds have fluctuated between the years of 2008 and 2015. It can be noted that the fund prices have been falling incrementally each year, but the notion that this is solely due to Roboadvisors is untrue as it can be seen that this trend was occurring before they had hit the market.

From the second graph it can be seen that the most popular ETF providers have the lowest transaction funds, with typically no transaction cost for custodian platforms. These are the ETFs most frequently adopted by Roboadvisors, which can largely be put down to the fact that management fees are a key contributing factor to the total cost of ETF ownership. Index ETFs will become increasingly popular as digitalisation encourages greater distribution and as ease of implementation becomes more of a necessity.

Impact of Roboadvisors on Overall Pricing Structures and Infrastructure Stack Pricing

Autonomous Research has analysed and compared the change in pricing structure between a traditional advisor, at 150 bps, a hybrid advisor, at 45 bps, and a B2C Roboadvisor at 25 bps.  The costs have been calculated using three pricing factors: (1) back and middle office, (2) asset management and (3) distribution. With the addition of a Roboadvisor, including the case of a hybrid advisor, it is evident that back and middle office functions are significantly reduced in cost. A decline  from 50 bps for a traditional to 10 bps for a hybrid and 5 bps for a B2C Roboadvisor. Distribution and asset management were still heavily impacted, each falling from 50 bps to 10 bps when changing from a traditional advisor to a B2C roboadvisor.

The second graph illustrates the difference in infrastructure stack pricing between a traditional advisor stack and a B2B private label stack. Within the traditional advisor stack in particular, we find the cost to be 50 bps but this figure is halved when compared with B2B private label stack. This is primarily due to custody costs being reduced to zero from 15, as it becomes monetized through asset management and does not require transaction fees for ETFs. Whilst most costs fall, there is a notable rise in client portal pricing that can be explained by Roboadvisors requiring more accessible platform for clients due to the lack of human interaction available.

Global Payments Market and Breakdown by Revenue Pool

Autonomous Research has estimated the size of the global payments market at $1.8 trillion in 2015. This figure is derived from the sum of liquidity, domestic, business cross-border and remittance payments.  It can be seen that B2B cross border payments and consumer remittance constitute for 16% of the $ 1.8 trillion total in 2015. Net interest and domestic payments make up the vast majority of payments and have been growing steadily over recent years.

On the right hand side the chart depicts the breakdown of consumer remittance and business cross border payments for 2015. Consumer remittance is defined as electronic transfers from a foreign worker to an individual in their home country, and is mostly present in North America with 54% of all payments. The remaining remittance payments occur in APAC and EMEA with 28% and 25% respectively. Alternatively, payments for business cross border are largely in Asia and the pacific, which constitutes for 45% of all payments. It can be seen that Latin America does not have a share in the $28 billion consumer remittance payments in 2015, yet it does make up 9% of all business cross border payments.

Impact of Roboadvisors and Blockchain on Revenue Pools by Industry

Autonomous Research estimates that the Blockchain and Roboadvice technologies will impact over $900 billion in revenue, reducing it by approximately $250 billion. The revenue pool from 2016 is derived from revenues in: (1) business cross border payments, (2) investment management, (4) remittance payments, (5) capital markets and (6) title insurance. It is estimated that the impact of Fintech will consist of reductions of $44 billion from Roboadvice and $204 billion from Blockchain in the form of digital ledgers.  All areas of the revenue pool will be reduced as a result of these technologies, with the exception of capital markets as their revenues rise from $212 to $234 billion.

On the second chart, we looked at the specific impact each technology will have on the respective industry. It shows that Roboadvice will solely affect inventory management as it reduces the industries revenues by $ 44 billion. Alternatively, distributed ledgers will lead to reductions in B2B Cross Border, remittance payments and title insurance. The reasoning for these reductions can be associated with the concept that the digitization of finance is typically a revenue-contracting development. Despite this, it can be noted that capital markets received an increase in revenue from Distributed Ledgers due to the fact that in secularly shrinking markets we equate cost-savings with expansion.

Addressable Market Analysis for Consumer and Small Business Loans

Autonomous Research estimates the opportunity for digital lenders in the US alone to be at US$1 trillion, excluding mortgages. At present there are $4 trillion in outstanding consumer loans in the US, although not all of this is available to digital lenders and we estimate instead that there is addressable consumer opportunity of $500 billion. This amount consists of $200-$300 billion for student loans, which have been mispriced by the federal government, allowing borrowers to potentially qualify for a lower rate. Auto loans will contribute $100 billion in prime and near-prime from non-banks. There is an additional $150 billion in personal finance in non-subprime credit card balances over $10,000, where the borrower has cash flow to move to a three or five year amortizing loan.

Small businesses are a further opportunity for digital lenders, with $310 billion in sub-$1 million loans to small businesses and an additional $100 billion in demand.  This unmet demand is sourced from estimates by the US Federal Reserve Bank of NY, who claim there is an unmet credit demand resulting from banks unwillingness to make smaller loans.  

Digital Lending Credit Risk and Yield Estimation

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Autonomous Research has estimated the difference between high and low credit card interest rates against that of digital lenders. The resulting industry interest rates are as follows: (1) 28.8% for average credit cards with a penalty rate, (2) 18% for the average credit card rate and (3) 12.6% for average digital lender rates. From these figures it can noted that banks have mispriced consumer credit risk by implementing a significantly higher interest rate compared to their digital counterparts. Consequently, it is apparent that the level of divergence between the highest and lowest quality borrowers is too narrow to differentiate between the best and worst credits, indicating that digital lenders can better match a loan rate.

The right-hand side graph details the yields gained from digital lenders in comparison to that of traditional bonds. Digital lenders yields have overtaken that of bonds, with 3-year loans from digital lending firm, Lending Club, averaging at 11% in comparison to Bloomberg US high yield rates of 9%. Additionally, Lending Clubs median returns are at 7% dwarfing Bloomberg’s investment grade corporate bond rates, which are at 4%. However, these rates are heavily dependent on today’s economic environment and rates may change when credit losses or interest rates rise.

UK and Europe Opportunities for Consumer Credit and Small Business Loans

Autonomous Research estimates the opportunity for digital lenders in Europe to be US$1 trillion at present. The UK addressable market is $260 billion, consisting of $93 billion in credit cards and $169 billion in consumer credit, although this figure ignores the $109 billion student loans market as current 1.5% interest rates on loans appear too low to entice digital lenders. Continental Europe is estimated to be a $500 billion addressable market. Despite this the European digital lending market is in a very early stage of development, issuing just $1 billion in loans in 2015, and consequently Auto loans are outside of the addressable market today. 

Small business loans are estimated to be a $51 billion market in the UK and $170 billion in Europe, with platforms such as UK-based FundingCircle being successful across four European countries. Additionally, many of the smaller SMEs in the US may not have access to bank finance and the overall market opportunity could therefore be greater.

UK Motor Insurance Premium & Profit Profile

Autonomous Research has projected the UK motor insurance premium and profit profile in the period 2015-2060. Our estimates indicate that premiums will see an annual 1.5% rise leading up to 2025 with the current 20% return on capital (ROC) shrinking to a more sustainable 10%. This is reflected by the sharper fall in profits in the period 2015-2025. In our view, 2025 will be the pivotal point for motor insurers as self-driving cars take hold and premiums fall by nearly two-thirds by 2060. Unsurprisingly, profits are also expected to fall in this period; however we do not assume a slash in profitability with ROC remaining roughly constant at 10%.

New Vehicle Sales Forecast From 2005 To 2025

Autonomous Research estimates that nearly two-thirds of new car sales will take place in emerging markets (EM) by 2025. Our forecast shows new vehicle sales in (1) Developed markets, (2) EM (China/India), and (3) EM (Other).  The rise of the car-sharing economy (among other factors) in developed markets has resulted in shrinking vehicle sales from 44 million in 2005 to a projected 39 million in 2025. Meanwhile, lower purchase prices and falling operating costs are pushing vehicle sales in emerging markets, from a combined 22 million in 2005 to a projected 68 million in 2025. This growth will be particularly visible in China and India where the rise in sales is estimated from 7 million in 2005 to 41 million in 2025.

Changes in Road Accidents in Developed Markets

Autonomous Research has analysed the trend in driving fatalities and injury crashes in developed markets over a 25 year period. Our research suggests that fatalities decreased -19% in 1990-2000 and a further -38% in 2000-2012. This can be attributed to increased government action and technological advances in the developed world aimed at preventing deaths in car accidents. On the other hand, injury crashes increased by 5% in 1990-2000 and sharply decreased in 2000-2012 at a rate of -24%. The fall in crashes is associated with a shift in technological advances, starting in 2000, targeted at limiting the number of crashes as opposed to fatalities. This was accompanied by a modest increase of 8% in miles driven during this period due to a fall in average mileage per car. As a result, roads continue to become safer (on average) in the developed world.