Herfindahl-Hirschman Index : Using the Regulator’s Tool to Marketers’ Advantage In Title Insurance Industry
HHI (Herfindhal – Hirschman Index) is an accepted measure of market concentration. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches 10000 (max) when a market is controlled by a single firm. E.g. the search engine market with three players Google (64%), Yahoo(18%) and Microsoft(13.6%) has an HHI index of 4624 indicating a very concentrated market. In a similar vein the Title Insurance Market has an HHI index of around 3000.
Typically, an HHI below 1,000 indicates an un-concentrated index, an HHI between 1,000 and 1,800 indicates moderate concentration and an HHI above 1,800 indicates high concentration. The market is concentrated with four large companies namely Fidelity National, First American, Stewart Title, Old Republic.
Zivanta Analytics prepared a market penetration strategy report for a large Title Insurance subsidiary. As a part of the exercise, Zivanta team used an innovative methodology to build a case wherein market concentration (HHI) in the Title Insurance industry in the various States, presented a unique market penetration opportunity.
The suggested methodology is demonstrated in this paper using the publicly available data ( ALTA) for Fidelity National, by far the largest Title Insurance underwriter in the United States.
The market was segmented into four quadrants wherein HHI index of each of the States in the United States is plotted on x axis and the market share of Fidelity in each of the states in (on y axis). Plotting the States by its aggregate HHI and Fidelity market share brings out four interesting scenarios.
Quadrant 1 (Retain Market Leadership): The states in this quadrant are those which have a high market concentration (high HHI) and high market share for Fidelity as well. Clearly Fidelity has a significant monopoly position which it should try and retain its turf. It is from Fidelity point of view a win – win situations. These states are : California, Indiana, Delaware, Nevada and New Mexico.
Quadrant II (Contain Competition): The states in quadrant 2 are those states where the market concentration is low, but Fidelity retains a leadership. Unlike in the Quadrant 1 case, here the competition is breathing down the neck of Fidelity. The strategy here is to contain competition since the market is fluid and missteps can have disastrous consequences. These states are : Iowa, Maine, Kansas, Alaska and Vermont.
Quadrant III (Grab Market Share): The States in this quadrant are those which have low market concentration and Fidelity is not the market leader. This is Fidelity’s happy hunting ground and it should clearly go in for dislodging the leader, because not much separates the number 1 from the rest. These states are : Arizona, Minnesota, Mississippi, Missouri and New York.
Quadrant IV (Inroad Difficult): The States in the quadrant are those with market concentration is high (high HHI) and market share of Fidelity low. There is a monopoly market leader and a huge gap separates the market leader from the rest. It will be rather herculean to dislodge the market leader in this case and might be a good idea for Fidelity not to expend energy and resources beyond the business as usual. These states are Alabama, New Jersey, Tennessee, Virginia and Washington.
Zivanta Analytics analysts regularly use such bi-variate market segmentation to help clients use market data to take informed business decisions.