In recent years there has been a boom in insurance comparison websites in the United Kingdom. These sites are increasingly UK consumers’ first port of call for motor and home insurance. Aggregators were estimated to have generated over 40 per cent of new private motor business Gross written premium in 2008.[1] The effect on the market has been price pressure and decreased customer loyalty. Customers have the most to gain from this development but there is also a risk of deterioration in product content and service. Insurers with large market shares are those with the most to lose, as this will affect both price levels and customer loyalty. As a consequence, traditional insurers need to choose a future strategy for adapting to the new market situation. The article will describe the effects of this recent market development and compare the situation on the UK and the Swedish market.
Introduction
This article will consider Internet price comparison sites in the UK and Swedish market, how they function, how they have developed and the current situation. These changes will be reviewed from a customer perspective as well as from the perspective of insurance companies and brokers. Finally, some reflections will be made on how insurance companies need to prepare themselves for this development. The article is based on information received in connection with Swedish Insurance Society scholarship trip to London and subsequent research into other sources on price comparison sites and price aggregators.
The fast growth of the market for price aggregator web sites has generated customer value but also major concerns over the effect on consumer choice. The customer may save money and time by using comparison sites but will the customer receive the right cover and make the optimal choice? Further, is the process transparent enough and not misleading? Those are issues raised from consumer interest perspective as well as from the broker organisations. The rise of Internet comparison sites will also have a large impact on insurance companies, which will be discussed in the article.
Price comparison sites in the UK
The market for price comparison websites for general insurance has shown an impressive growth during the last few years in the UK. The number of web-based aggregators as well as the number of people using these sites has increased rapidly. The vast majority of sales are still in motor insurance but is also spreading to household insurance. Aggregators were estimated to have generated over 40 per cent of new private motor business Gross written premium in 2008[2] and more than 75 per cent of motor insurance buyers used a price comparison website last time they renewed their policies.[3] A trigger on the UK market seems to be the combination of customers using Internet for all types of purchases combined with a price focused and very competitive insurance market. There has also been mistrust in the UK market of traditional independent advisors among consumers, which has left the door open to new actors. The rush of new price comparison companies entering the market and consequent investments in marketing of their services has increased public awareness of their existence and of the benefits of comparing prices for insurance. This further fuels already existing customer behaviour in the UK of regularly shopping around for cheaper insurance.
The on-line aggregators have also reached a higher sophistication level over the years with simple to use websites covering large parts of the insurance market. The price comparison sites differ in both choice of revenue model as well as in product focus and level of sophistication. A price comparison site may offer a broad range of non-life products or be focused on providing certain specific products.
The revenue models vary, the ‘tenancy agreement’ is where a minimum ‘rent’ is payable for the insurer irrespective of size of revenue. Another example in the market is straight revenue sharing agreements. Commission could also be based on number of “clicks”, regardless of whether a sale is made or not.
The number of insurers included in the comparison also varies between price aggregators. Car insurance comparison site Tescocompare.com offers a limited field with just 25-30 brands. Confused.com, who has been on the market for several years, claims to compare covers from companies insuring over 97 per cent of the UK car insurance market. The amount of information given will also vary. For instance, uSwitch.com includes a set of filters that enables the consumer to see quotes with specified features. Other sites give the buyer opportunity to compare quotes based on pre-defined factors. Some sites are affiliated to or in some cases even owned by insurers – confused.com is, for example, owned by the insurer Admiral.
Price comparison sites in Sweden
There are much fewer comparison sites in the Swedish market compared to the UK. In Sweden, there are currently three price aggregators on the market, Insplanet.com (in cooperation with Pricerunner), Compricer.se and Insurancefinder.se. All three aim at comparing all insurers on the Swedish market for private line insurance. The sites vary in setup and operating model. Insplanet combines the web price comparison site with their own call center. They also have a comparison with Pricerunner, the largest general price aggregator in Sweden. Compricer also offers price comparisons for banking and savings services but Insplanet and Insurancefinder are specialised on personal line insurance. The price aggregators in the Swedish market have not been able to reach commission agreements with the four largest insurers (holding almost 90 per cent of the market for private line insurance).
A large share of the business generated on the sites is therefore not providing the price aggregators with revenue. As a consequence, there is less available capital for further investments in marketing and consumer awareness of the services. The market structure is an important differentiator between the UK and Swedish market.
The author’s own random test of the sites in Sweden indicate that the customer seeking insurance not always gets immediate price information when entering the required information. For some products aggregator sales staff as a first step will contact the applicant. In other instances, price will be given directly as a response on the input information but the customer is prevented from concluding the policy over the web. This is the case when insurers not cooperating with the comparison site issue the policy. The applicant is then asked to contact the insurance company including a reference to the company site.
More and more Swedish customers are using price comparison sites in their insurer selection process and the rate of new users is accelerating. Third quarter numbers from Insplanet indicate that the number of price calculations doubled during 2009 reaching a level of roughly 600 000 yearly price calculations.
Consumer perspective
A recent study in the UK market found that the number one criterion for buyers of insurance is price.[4] Using a price comparison site is an easy and convenient way to display many insurers’ prices for the particular product the customer is interested in. This enables the customer to find the cheapest deal for the cover required.
Price aggregators also save time. The consumer needs to enter just one set of details rather than repeatedly enter the same information over and over to several insurers. The filters that some sites offer also provides the customer with a simple way of breaking down the list of quotes into a list showing only the quotes that fulfil the requirements the customer have on the policy to be purchased.
One disadvantage of the increased transparency of prices is that it may lead to heavy focus on price, overshadowing policy features and good service. In order to get the most accurate comparison, the consumer needs to compare like-with-like. Do the policies compared offer the same protection? Offered sum insured may be different, the conditions may vary and the quotes may be based on different deductible levels.
In the UK there is no single comparison site covering the entire market. The aggregators cover different shares and give quotes from different insurance providers. To get the fullest comparison the consumer would have to visit a range of sites, and get quotes directly from some insurers refusing to cooperate with the price aggregators. One example is Direct Line, one of the major car insurers in the UK, which is not represented on any comparison site.
Quotes given by the same insurer for the same policy may be different on one site compared to another. As the aggregators use different set of questions, the price group the customer will end up in may differ. Revenue models also vary between the UK comparisons sites, which also could have an effect on price.
Also, as the consumer moves on in the process, the price first quoted by the comparison site sometimes changes significantly once the quote has been passed through to the insurer. The sites claim that this is because the insurers try to boost the price by adding extra features.
Insurer and broker perspective
For insurers with large market share there are few benefits in the emergence of price comparison sites. Price pressure will have an adverse effect on profitability and savings in distributing the products via Internet will most likely be consumed by commissions to price comparison sites. Recent measurements among customers acquired via price aggregators show doubled churn rates compared to sales via direct marketing.[5] Selection of insurance providers is no longer based on a relationship with the insurance company, but rather based on the price and content presented by the price comparison site.
However, for smaller insurance companies, new entrants to the market or niche players, price aggregators could act as the major distribution channel replacing internal distribution networks and high investments in branding. As for brokers catering to private consumers, the comparison sites are also bad news. It is difficult to see their role as an intermediary for simpler insurance solutions if comparisons are easily available on the Internet.
Conclusion
Price aggregators have captured 40 percent of the market for motor insurance in the UK. More than 75 per cent of those buying motor insurance use a comparison site prior to purchasing a policy. The home insurance market is showing a similar development. Price comparison sites are here to stay in the UK, and are likely to emerge as important forces in other European markets.
The Swedish market could be the next to follow. Household Internet penetration is higher here than in the UK. Customer behaviour is also adapted to the Internet. Sweden is among the top three in the EU for share of consumers buying goods and services via Internet.[6] The number of price calculations on Swedish Insplanet doubled in 2009, indicating that price aggregators are gaining momentum in the Swedish market. We believe that there is still generally limited awareness among the public that this service is available. There are only a few price comparison sites on the Swedish market and they have only recently started investing in marketing of their services. Several price aggregators in the UK have indicated plans for international expansion, with the Nordic countries identified as one of the most interesting regions to invest in but such investments have yet to appear on those markets.
Although there are some concerns for how content and prices is compared and the way in which price comparison sites conduct the comparison, there are mostly benefits for customers in price transparency and ease of use.
Insurers urgently need to consider their strategic options. It’s conceivable that insurance providers could yet mount a fight back against price comparison sites. But their chances of success will depend on the nature of the markets in which they operate. The large players in a highly concentrated market could simply opt out of co-operating with price comparison sites – for example, refusing to pay commission for traffic generated by comparison sites and blocking access to price information on their own sites. This could, eventually, starve the price comparison sites out of the market. But this option will not be feasible in markets with a large number of competitors – as noted in passing, there will always be competitors willing to work with the comparison sites. In such markets, large insurers’ best course of action will probably be to launch comparison sites of their own, in the hope of replacing lost direct-sales revenue with commissions earned by directing customers to other insurers. Admiral Insurance has made a success of this strategy with its UK price comparison site, confused.com.
Another option is for national insurance associations to establish a common price comparison site. This would still result in increased price pressure and customer churn, but would remove the cost of commissions and discourage more price comparison sites from entering the market. Forsikringsguiden.dk is a Danish example, although it was originally established as a critical response on the fact that the industry lacked transparency rather than on competitive grounds. For those markets where the price comparison sites have already gained a foothold, there will be no turning back. Insurance premiums will in future be set with reference to the lowest bidders. To compete while maintaining acceptable combined ratios, insurers will have to combine skilful pricing of risk with tenacious cost management – and learn to work with the comparison sites rather than trying to push them out of the market.
[1] Datamonitor, “UK Private Motor Insurance 2009”. This article was written in connection with a highly appreciated trip to London to study the Britsh insurance market, arranged by the Swedish Insurance Society in 2008.
[2] Datamonitor, “UK Private Motor Insurance 2009.
[3] Datamonitor, ’UK Insurance Aggregators’ Consumer Intelligence (CI) Survey 2008, ’Home insurance next comparison battleground?’ www.yourmortgage.co.uk.
[4] Datamonitor, ’Aggregators in UK General Insurance 2008: A Growing Force (Examning the UK Market for Insurance Aggregators), March 2008.
[5] 2008, Journal of Direct, Data and Digital marketing practice.
[6] Eurostat, Consumers in Europe, page 135.