Some insurer contracts ‘limit price competition, reduce innovation and restrict entry’
The Competition Commission (CC) has moved to ban price comparison websites from striking deals with insurance companies that stop them offering policies cheaper elsewhere.
The CC said the most favoured national (MFN) clauses used by aggregators have a “problematic effect on competition”.
In its report, published today, the CC said some contracts between insurers and aggregators contained conditions that “limited price competition, reduced innovation and restricted entry”.
“These wide MFN clauses are a feature of the price comparison market. The result is that consumers pay higher motor insurance premiums.”
The CC said that the clauses meant that price comparison websites had no incentive to seek better deals for their customers, and that commissions could be increased without fear of losing business to competitors.
“With a wide MFN clause in place, a price comparison website does not face the possibility that a retail customer will find the same policy more cheaply on a competing price comparison website. There is little incentive for a price comparison website facing a competitor with a wide MFN clause to seek better prices for their retail consumers from insurers because that better price would be passed on to the competitor also. There is, therefore, little reward for price reductions.
“Conversely, a price comparison website with a wide MFN clause need not be concerned when it raises commission fees. It is safe in the knowledge that this will not make sales through its channel less competitive compared with sales through other price comparison websites,” it said.
The CC stopped short of banning MFN clauses entirely. It said agreements that a direct insurer won’t offer a policy cheaper on its own site can still be used.
It said price comparison websites enhance rivalry in the insurance market, and that MFN clauses were necessary for their continued existence.
The industry has until 17 January to respond to the recommendations.
MoneySupermarket chief executive Peter Plumb said welcomed the proposals.
He said rival price comparison websites had used the clauses to block it from offering cheaper prices. “This is good news as it will allow us to offer better prices for the same cover to even more customers,” he said.
“Our overriding strategy is to get drivers cheaper prices for the same cover at MoneySupermarket, than on any other price comparison website. As the only major independent price comparison website in the UK we’ve been working with insurers to deliver this to our customers.
“However, some price comparison website competitors have tried to stop us by using clauses that force price parity across all price comparison websites and therefore prevent an insurer offering a lower premium through us.”
“We are delighted that the Competition Commission is proposing to stop this practice by some of our competitors.”
But comparethemarket.com managing director Paul Galligan said MFN clauses play a big part in “getting the very best price for our customers.
“I can’t imagine asking our customers to accept anything but the best deal and we will therefore continue to negotiate on behalf of the 4 million customers that use comparethemarket.com every month to ensure we continue to offer the very best choice, value and service,” he said.
Good for brokers
Biba described MFN clauses as “anti-competitive” and said dong away with them would help high street brokers offer cheaper prices than price comparision sites.
“If a customer walks into a broker’s office, we believe they should be able to offer the premium at a cheaper price. Comparison websites typically charge around £40 to £50 per lead and this saving could be passed onto customers if the use of MFNs are restricted,” said executive director Graeme Trudgill.