Taking over

Love it or hate it, the aggregation model is here to stay. In the past couple of years the popularity of price comparison sites offering motor insurance quotes has exploded to the point where aggregators now enjoy more than 70% market share.

Research shows that aggregators will take about £1bn in premium over the next few years — with the majority of that resulting from motor insurance sales. Powerhouses such as Confused.com, GoCompare.com, Moneysupermarket.com and Tesco Compare have used their massive marketing spends to plaster tube stations and television ad space with their brands.

Insurers and brokers will readily admit, albeit sometimes through gritted teeth, that aggregator sites are likely to remain the preferred vehicle of distribution for motor insurance.

But at the same time, it’s a model that hasn’t been kind to all insurers. It has been blamed for keeping motor rates at unprofitable levels and transforming the market into one that is largely price driven – it has created a distribution channel that is increasingly difficult to compete in.

So how will insurers make money through a distribution model that encourages underpricing and a lack of customer loyalty? If aggregators are the way of the future, will there still be a future for all UK motor insurers?

Aggregator strength

“Whether you like it or not, we have to make it a profitable market because customers like it,” says Chris Hill, managing director of motor specialist Highway Insurance. It’s a mindset adopted by many insurers and, in fact, some have found the model to be particularly beneficial.

For consumers, aggregators claim to offer total transparency and an opportunity to shop around and ensure they are getting their policies at the price they want. For insurers, the model offers fixed costs, a high targeted customer base and a reduction in administration costs.

David Tyers, director of Norwich Union (NU) Direct, says: “For smaller brands that don’t have a large marketing budget and are less well known to consumers, this is a very attractive model because they can see a flow of business coming in with absolutely no up-front risk.”

According to Will Thomas, head of motor insurance at Confused.com, some insurers depend on aggregators for 100% of their motor quotes.

Aggregators are known to offer a very low cost per sale. It costs insurers £35 to £60 to sell a policy through these sites compared with the astronomical costs of television ads and other marketing ploys.

The filtering systems on the sites allow insurers to target exactly the kind of customer they are looking for. They also give insurers and brokers access to huge pools of potential consumers to whom they can sell other products.

In the past year, aggregators have also made great strides with their technology and question sets to ensure that customers are getting exactly the kind of motor cover they want, leading to fewer complaints and happier consumers.

It has become a massive channel of distribution and aggregator sales are constantly on the rise, says Peter Markey, project manager at direct insurer More Th>n. “The marketing spend of aggregators is up 200% every year,” he says.

But where three quarters of all insurers are enjoying some success and profitability with aggregator sites, others are suffering from the squeeze on profits and margins.

Norwich Union’s 2007 results showed one of its worst performance years in recent history. Profits were down from £1.2bn in 2006 to £433m. It also lost more than £100m of business with its net written premium falling to £5.4bn from £5.6bn in 2006. It reported an underwriting loss with its combined operating ratio rising to 106%.

Although much of the loss was attributed to weather-related catastrophes and declining rates, the company also pointed the finger at problems with its direct arm, largely due to the intense competition brought on by aggregator sites.

It is the lean and strong direct players that tend to thrive on price comparison sites, says Confused.com’s Thomas. The larger brokers and insurers struggle to compete.

Competitive prices

For major insurers, the devil is in the detail. Absolute transparency has placed a downward pressure on prices. Companies with higher overhead costs, unwilling to decrease prices, will have a difficult time competing against the smaller, more agile companies.

“It’s very price driven,” says Stephen Ross, partner at Deloite. “To generate business on aggregators an insurer needs to be in the top three. And to get the volume they require, they have to keep prices competitive.”

Markey says More Th>n has managed to make a profit from aggregator sites, but it has come as a result of a lot of ‘

creativity, hard work and constantly staying on top of the numbers. “The challenge will be to manage the full-life journey of aggregator customers,” he says. “If you don’t have an approach to cross-selling or retention, it would be difficult to make a profit across the board.”

Insurers are well used to the frustrations of the motor market. According to research conducted by Deloitte, the combined operating ratio for the total UK motor insurance market has been over 100% over the past several years, with insurers unable to make a profit in that line of business.

Last year, insurers raised premiums by a combined total of 8.2% — a direct result of exasperation over the poor rates — however the increase was nominal and won’t make a huge impact on profits, says Deloitte.

Although aggregators are said to be a factor in keeping rates at unprofitable levels, insurers say they must continue working with the sites or risk sacrificing significant volume.

“It’s created a really big market and with that you are going to get really low prices,” says Thomas.

Aggregators have also been blamed for encouraging insurance customers to be price driven — less concerned with product details and brand loyalty and more likely to shop around come renewal time.

“The downside is that the first year retention is lower than other areas,” says NU’s Tyers. “All brands must do the maths and must think downstream. This business will not retain as well.”

Adapting to the aggregators

With that in mind, More Th>n has spent the past 12 months strengthening its relationship with price comparison sites and working on innovative ways to keep customers coming back.

“ We have really stepped up efforts to work with aggregators,” says Markey. “They are more than happy to share their marketing and growth plans with us. Working with them is key and it’s something we are willing to do.”

As such, More Th>n is in the process of introducing incentives for retention, which include partnering with external companies to provide policyholders with deals and discounts on everyday products and items.

Confused.com’s Thomas admits that aggregators have changed the way many insurers work. “They are having to be more creative,” he says.

Thomas says Confused.com is seeing some insurers taking steps such as increasing the compulsory excess, which reduces the risk for them and also allows for quoting cheaper premiums.

Markey says because of the good relationship More Th>n has with aggregators, many sites will provide the insurer with the contact details of visitors and potential customers when a quote comes up in the top three of price comparison search results.

More Th>n then follows up with a welcome call to explain its policies in more detail. It provides an opportunity to discuss add-on features as well, adds Markey.

Pricing model

The pricing model is likely to be an ongoing challenge for insurers working with aggregators. After all, if aggregators are keeping motor rates at squeezed levels, how will insurers ever return to making a profit from premiums?

“Insurers must have a bottom line they aren’t willing to go below,” says Ross. “When you look at the different players in the market some have been very successful and it comes down to niches and their pricing model.”

Tyers says the reality for any market is that different prices can co-exist. Whereas some customers may be entirely price-driven, others will be more concerned about value for money. The challenge for insurers will be getting that balance right.

“Each individual player in the market has to set rates at a level of return that is profitable,” he says. “It won’t be easy, but it’s what successful companies need to do to keep pushing ahead.”

Although experts agree aggregation is likely to be main vehicle of distribution in the next 10 years, price comparison sites themselves will begin to feel the cost pressures of trying to maintain their extravagant marketing spends.

“In order to keep their brand, they will have to keep up the marketing spend and that will lead to consolidation,” says Ross. “There will probably be a small number of very successful aggregators coming out of this in the future.”