Realist, not conformist analysis of the latest financial, business and political news

The Terrors Of Price Comparison Websites

The creators of money

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
Quentin Vole
4 years ago

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
jgh
4 years ago

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
djc
4 years ago

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
Jim
4 years ago
Reply to  djc

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.

Jim
Jim
4 years ago
Reply to  Tim Worstall

If that were the case, why would any insurer stay in business? They might as well close up shop and just invest the lump of capital they they invested in the first place and just accept the risk free returns from that.

Aviva’s combined ratio last year (2018) for example was 94% for the UK market. That is to say the cash out was 94% of the cash in, and thats before any investment returns. Given the yield on the FTSE 100 is currently just over 4% they’re making more money from insurance than investment.

Quentin Vole
Quentin Vole
4 years ago
Reply to  Tim Worstall

the float is vastly larger than the capital. Thus it’s a form of gearing to investment returns.

As Warren Buffet spotted many moons ago.

Jim
Jim
4 years ago
Reply to  Tim Worstall

Yet they’re still making money from the insurance activity which you just blithely informed us they don’t……….

Jim
Jim
4 years ago
Reply to  Tim Worstall

Here’s some figures on the UK insurance market:

http://cdn.roxhillmedia.com/production/email/attachment/720001_730000/Fitch%20UK%20Non-Life%20Insurance%20Company%20Market%20Dashboard%20-%202018%20Results%20-%202019-03-20.pdf

Admiral, Direct Line and Hastings all have combined ratios of 90% or less, ie are making 10% profit on their premium income.

Are you still maintaining writing insurance is a loss making (or at best break even) business?

Jim
Jim
4 years ago
Reply to  Tim Worstall

Um, thats NOT what you said further up this thread: Quote: ” insurance companies traditionally lose money on writing insurance contracts. Payouts are generally higher – including costs – than premiums that is.” Which I have just pointed out is not true, certainly not for all insurance companies. Some may lose money on the underwriting, at some times maybe, but not as a general rule. And as for the earnings on insurance being less than the general rate of profit in the economy, how many companies make over 10% on gross sales? Tesco for example made just over 2bn profit… Read more »

Quentin Vole
Quentin Vole
4 years ago
Reply to  Jim

Tesco don’t need £57bn in capital to create that £57bn of sales – it’s a few percent of that figure (they have other capital invested, of course).

General insurance is (literally) the textbook example of a cyclical market. Returns increase and companies drop their premiums to get more business, which causes returns to drop and companies increase their premiums again. All this repeats with a cycle time of a few years and is well recognised within the industry.

Jim
Jim
4 years ago
Reply to  Quentin Vole

An insurance company has far less capital invested than they have premium income, thats already been pointed out above as the reason why insurance is a good business to be in as the premium income float leverages your capital investment.
And while insurance is indeed cyclical, so are many businesses, and they aim at least to make a profit over the business cycle. Not to perennially run a deficit on the underwriting which is then offset by the investment income.

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