Information. It’s the lifeblood of any market, enabling buyers and sellers to make the decisions that keep the wheels turning. The importance of customer access to information as a necessary condition for competition, and therefore market efficiency, is one of the few things that all schools of economic thought actually agree on. That, and the need for many sellers and/or channels to minimise the likelihood of collusion and price-fixing.
In that light you might expect the advent of price comparison sites to have turned the consumer insurance market into the epitome of a perfectly competitive free market. It has plenty of insurers competing through multiple channels, and also huge amounts of readily accessible information about products and pricing disseminated through a wide range of independent sources.
But something is going very wrong.
Those meerkats have teeth
From the numerous brands and high profile advertising, it’s easy to assume that that price comparison sites are independent, objective, competing and, by implication, acting on behalf of the consumer.
This is not so.
There is a high degree of market concentration. For example, Confused.com is owned by Admiral Insurance, who also own Elephant, Bell Direct and Diamond. Gocompare.com is independently owned, but had a loan of £30m from Esure who own 50% of GoCompare holdings. Comparethemarket.com is owned by Budget Insurance, who also own Dial Direct, Quote Mart and Junction, who in turn run the insurance arms of The Post Office, M & S, Debenhams, Homebase and yesinsurance.com. Tescocompare.com is a joint venture with RBS, who also own or have a significant interest in, Direct Line, Churchill, and Privilege. Doesn’t sound very independent does it? And with that market concentration comes leverage.
Insurers over a barrel
As a route to market, the insurers have little option but to use the price comparison sites as most insurance companies will not have a large enough advertising budget to take them on directly. However many of the insurers are becoming worried about the draconian terms that these sites are increasingly insisting upon.
One clause of particular concern is known as the ‘Most Favoured Nation’ (MFN) or ‘Best Price’ clause, to the extent currently being challenged by a number of insurers who are urging the competition commission to review its decision not to investigate such practices. Here’s how it works, not only against the insurer and the consumer but also, you, the intermediary.
Most Favoured Nation – Gunboat diplomacy in the insurance market
Most Favoured Nation clauses are most synonymous with trade treaties and agreements between countries in respect to tariff and non-tariff barriers to trade between nations.
However, the MFN clauses being utilised by aggregators in the General Insurance markets restrict the ability of insurers to offer a better price through their own site than that offered through an aggregator site. To some extent this is understandable, IF it stopped there. The aggregators don’t want to spend millions of advertising pounds driving traffic to their site only to see the customer going direct via the insurers own website if they can get a cheaper premium that way.
However, in a recent twist BGL group who owns comparethemarket.com have introduced an MFN clause that extends far beyond the insurers’ own web sites to cover “all” distribution channels – and yes, that includes contact centres and brokers. It’s a move that is likely to prompt the other aggregators to follow suit.
Taken to it’s logical conclusion this could be viewed as price-fixing. It’s certainly counter-intuitive to the basic purpose of a comparison site, but more importantly, it undermines the underwriters’ ability to price for risk – including channel risk.
Insurers fight back
Insurers are challenging this recent development on the basis that it distorts the market, and by restricting their ability to effectively price for risk, it will ultimately increase the price to the consumer given that many underwriters view business written via the aggregators to be higher risk.
The Competition Commission is thought to be taking this submission very seriously.
The insurers also argue that this type of MFN clause will provide the aggregators with little or no incentive to innovate or differentiate between the products and services they offer via their websites. They believe that banning the use of MFN clauses by the price comparison sites would create greater competition and increase cost efficiency, which would ultimately benefit the consumer with lower prices.
Yet another example of how these dominant players are attempting to further control the market and ultimately there is only one person that pays – the consumer.
Kevin Paterson is managing director of Source Insurance.