ARIA 2021 Annual Meeting

Tao Sun, Lingnan University; Mary Weiss, Temple University

Diversified firms often compete in several markets simultaneously leading to so-called multimarket contact (MMC). This study examines the effect of MMC on homeowners insurance price and product innovation in the U.S. from 2000 to 2017. We find that the level of MMC is positively related to upward changes in the homeowners insurance rate and higher homeowners insurance price generally. More importantly, we find that the level of MMC is negatively associated with homeowners insurance product innovation. We also find that the state-level MMC is positively correlated with the average cost of homeowners insurance. These results are consistent with the mutual forbearance hypothesis, i.e., MMC may facilitate tacit collusion and thus weaken market competition. To address the potential endogeneity issue of using MMC measures, we use the instrumental variable regressions. We conduct a variety of robustness tests and find that our main results are robust to potential biases due to measurement problems in homeowners insurance price change, measurement errors in MMC, and the impact of the 2007-2009 Great Financial Crisis. This paper offers the first study of MMC in the U.S. homeowners insurance market showing that insurers’ product overlaps across geographical markets is an important pricing factor and that the level of MMC has a dampening effect on product innovation. Our results have important implications for insurance regulatory policies, most importantly, simple measures of the degree of competition such as the Herfindahl-Hirschman index are not always reliable measures of competition. Keywords: multimarket contact, homeowners insurance price, product innovation, diversification