Advertisers have been the main winners as comparison sites make slim profits

Online price comparison sites have ushered in “unnecessary competitiveness” and severely eroded UK motor insurers’ profitability, according to actuarial consultancy Towers Watson.

The websites, also known as aggregators, cost the industry £1bn in “unnecessary price competition” while generating only £50m in profit for a few insurers, according to an article by Towers Watson directors George Maher and Ryan Warren and senior analyst Andy Staudt.

“The sites have encouraged greater price competition while not showing much profitability themselves, channelling revenue to advertisers,” the article said.

However, it found that advertisers have more than doubled their revenue from aggregators.

In a typical competitive situation, each new entrant into a market creates additional supply, reducing profits – in theory down to zero. However, Towers Watson believes the situation with aggregators is much worse, arguing that insurers are cutting prices below actuarially fair rates to maintain volume.

“The past 10 years should have been extremely profitable, with inflation steady at around 2%. But instead, the industry has been taking larger and larger losses,” the article said.

With economists forecasting several years of high inflation in the UK, Towers Watson contends that the thin profit margins insurers are accepting as a result of aggregators’ presence are unsustainable.