The Terrors Of Price Comparison Websites

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This is one of the less strong complaints about the current body politic. Advertising costs money, so it does:

Up to a third of drivers’ insurance costs go on secret commissions charged by price comparison websites, which can be as much as £160 per policy.

These websites charge insurers to display their policies to consumers. Most insurers have little choice but to pay up, as the majority of car insurance is bought through price checking companies.

The costs are then passed on to drivers through higher insurance prices. These flat fees are typically around £60, but range from £40 to £160.

The average comprehensive motor insurance premium is £485 a year, according to the Association of British Insurers trade body, meaning these commissions make up 8pc to 33pc of a typical driver’s bill.

The process of selling us something, anything, costs money. This is true whether the seller uses print, word of mouth, online, comparison engines or anything else. The question therefore is not how much does the one method cost in and of itself, but what is the cost of the one method relative to the others?

That all insurers – near all at least – do use the engines means that the engines are more efficient, cost less, than the alternatives. Meaning that the actual cost to us consumers is negative for the engines, not positive.

If this were not so then there would be a niche in the market. Create the insurance company, build the policies, and then don’t advertise at all. Save that 33%. Just have the one website and see how the startling price reduction floods you with bargain seekers entirely driven by that word of mouth.

Hmm, it doesn’t work that way? OK, so the comparison engines aren’t costing the insurers then, are they? Given that being an insurer doesn’t work in the absence of the engines.

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Quentin Vole
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Quentin Vole

The providers that “don’t appear on comparison websites” (LV, Admiral, Direct Line, …) but do their own advertising should provide an easy check. Are they significantly cheaper than the comparison site? Not usually in my experience, though they certainly can be. Equitable Life operated for centuries paying no commission to intermediaries or staff. The result was that they got business from those knowledgeable enough to do their own research and find them (including large operators like the Federated Superannuation Scheme for Universities) and achieved very good returns because of their reduced initial costs. Then they were ‘taken over’ (they were… Read more »

jgh
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jgh

Hmmm…. I use a broker, so any money for finding the policy goes to the nice chap at the end of the street. Though, presumably, the insurers are having to spend money to make knowledge of their policies available to him.

Suspicious cynic that I am, I’m probably just paying him to use the comparison websites. 🙂 So what? I’d rather use that time to do stuff I want to do.

djc
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djc

The basic flaw with all this, is the assumption that the price is computed by starting with a unit cost of the base goods or service and then adding on all the intermediary costs like advertising and brokerage. Thus leading to the naive notion that ‘cutting out the middle-man’ will get you to the one true value. It doesn’t work like that, for the business to remain in business two things must hold: revenue must cover the full long run costs of the business, and the price offered to a potential customer will on aggregate generate the revenue required.

Jim
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Jim

Exactly – insurers charge what they can, regardless of what it costs them. Hence the way they gouge customers who stay loyal to them by increasing their premiums every year regardless of any cost or risk changes, on the basis enough will pay the higher price to justify those who up sticks and leave. None of that is driven by costs at all, just desire for more easy profit.