ComparetheMarket’s abuse of power is remarkable. Distribution’s grip on insurers continues to grow. Can it be stopped?
Blow dust off the cover, and read again Michael Porter’s business classic on Competitive Strategy. Written 40 years ago, the ideas still hold true today.
His most famous idea was that businesses are pulled by five forces - threat of substitutes; threat of buyer power; emergence of new entrants; competitive rivalry; and threat of suppliers.
We are fascinated by the threat of a new entrant, and when you hear Amazon is gearing up to enter insurance, it sends a shudder down the spines of many insurance executives.
But for insurers, the greatest pressure comes from suppliers.
Insurers have lost so much power versus distribution.
ComparetheMarket is so fascinating because the competition watchdog’s findings show the aggregator, with its 50% market share, ruling over insurers with an iron fist.
Insurers that failed to strictly enforce its unfair rules faced being delisted.
Desperate to maintain their market share, and meagre 2% profit margins, home insurers complied with the Commparethemarket’s demand not to offer lower prices on competitor price comparisons.
The power of distribution versus producers in the UK is a long-running theme that runs right across the insurance spectrum.
In commercial lines, we see the likes of Aviva refusing to work with GRP over increased commission demands from its acquired brokers.
GRP, who feel their acquired brokers were under-commissioned anyway, loses the UK’s largest insurer, but can turn to more compliant insurers.
In the London market, Aon and Marsh have swallowed up their two nearest rivals. Their power is immense over insurers.
Broker consolidation has shrunk power into the hands of a few, putting greater pressure on insures’ profit margins.
Change ahead
Will the balance of power ever shift?
Regulation is probably the biggest threat to suppliers dominance. We’ve already seen the intervention in retail pricing from the FCA likely shrink aggregators dominance, and the competition watchdog put the brakes on ComparetheMarket’s contracts.
In commercial lines, the extended chain of distribution, with so many mouths to feed, will eventually come firmly into the firing line of the regulators.
They have already touched on it, giving tradesman as an example. This is the tip of the iceberg.
The regulator will not stand for distribution taking unnecessary fees, charges and commissions which result in inflated premiums for customers.
The regulators have armed themselves with data, analytics and the right people to understand and attack the complex business models of insurance.
The theme for UK general insurance over this decade is set: insurance must focus on value over price.
Insurers are coming to realise this, but intermediaries will get their wake up call.
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