Commercial aggregators: Moving targets

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Aggregators have gradually exerted a stranglehold on personal lines insurance distribution that only the most powerful marketing budgets can now compete with. Ralph Savage investigates the potential for aggregators to shift their gaze towards commercial lines.

There is a palpable sense that, with the right combination of investment to create brand awareness and ability to meet customer expectation, commercial lines aggregation could be a reality within the next few years. If you boiled down what the 'yes' camp says, that's pretty much it on the nose.

Conversely, there is an opposing school of thought that says insurers have been burned by the experience of personal lines price comparison sites. Observers say they have made frequent underwriting losses because their pricing models cannot keep up with the dynamics of quoting 100 000 times a day and, since there aren't enough standardised online commercial lines products that can be scooped onto one site with a simple question set, SME aggregation still has a way to go.

Multiple shades of grey can be found between these two competing opinions but there is consensus that if something is about to happen, it hasn't happened yet. Three of the big four aggregators — Compare the Market, Confused and Go Compare — offer access to small commercial insurance by way of click-through services to other sites, but nothing on the scale of what consumers expect from private motor is available yet.

A typical aggregator?

That cohort of other sites established in the past few years, such as Simply Business and Iprism, is servicing this click-through development from the aggregators and has invested heavily in IT, product development and links with brokers and insurers. However, no one seems willing to call themselves a commercial aggregator.

One of the most recent entrants to this group is Coverzones: "The big four have a business model that sits on top of websites, using an automated web service that talks directly to providers, bringing back a range of quotes," explains Coverzones' chief executive officer Simon Ball. "If that's how you describe a typical aggregator then we are not typical. We do offer that choice dynamic, but what you can't do in a business insurance space — this is why the market is still relatively embryonic — is sit on lots of insurers' websites and bring back consistent products. Those websites simply don't exist and neither do the products."

Web-based broker extranet provider Powerplace denies the aggregator tag in one instance but accepts it as a mark of providing choice: "It depends how you define one," says Powerplace chief executive officer Matthew Reed. "We are not like Moneysupermarket or Confused because the products exist within Powerplace. If you say an aggregator provides the ability to obtain multiple quotes, then we are one."

Appetite for online

Perceptions of rising demand are receiving considerable emphasis with the oracle of consumer behaviour — Google — providing compelling evidence that there is real growth in requests, specifically for price comparison of commercial cover through search engines.

Trawling through Google's free service Insights for Search reveals a 55% increase in searches for 'compare business insurance' in 2009 over 2008. Google also provides information on rising searches you may not have thought of. So, for example, 'commercial insurance market' rose 120% in 2009.

With this kind of potential, you would think it safe to bet the established aggregators are climbing over one another to get a piece of the action. But the response is varied; Confused declines to comment over and above confirming the fact its offering is limited (see box, p21) as are its plans to offer anything further.

Compare the Market's offering, like others in its peer group, directs customers through to Simply Business; one interesting characteristic of this partnership is that Compare the Market has retained its own branded header as part of the link — a luxury that other partners Go Compare, Confused and Tesco Compare do not enjoy. Compare the Market's commercial director Jeremy Moll says: "We see this as being very important because our brand is now the most highly recognised price comparison name in the UK and we have very quickly created an ethos of trust. If we are going to endorse something, we think we should put our name to it."

Mr Moll's view of the market potential in SME commercial is conservative. "There are around four million SME-type firms in the UK, but realistically the target market worth going for is probably around one to 1.5 million with zero to nine employees," he says. "These individuals are increasingly using comparison sites to buy personal insurances and will do so for relatively straightforward policies with average premiums of £200 to £500. We saw an eight-fold increase in the number of visitors to our SME insurance service between November 2008 and November 2009 and, during the course of 2010, we expect around 500 000 visitors."

So, will we be seeing little meerkats wearing hardhats on TV? "You won't see above-the-line marketing on SME," Mr Moll responds. "In the grand scheme of things, it remains a relatively small part of our business."

Of the big four aggregators, Moneysupermarket is surprisingly the only one without an active offering or partnership. Its page simply directs customers towards a selection of seven providers. Julie Owens, head of home and home services at Moneysupermarket, claims it was "quick to spot the increasing opportunity" in the small commercial lines space and has been "offering a directory type listings channel for SME business customers since 2007".

It seems the UK's largest aggregator by market share is now considering something more substantial. "Over 2009 we saw 18% visitor growth, with an average of one in four customers receiving a quote going onto buy, which is a real indication of the small business owner's increasing confidence in arranging insurance for their business online. We look to continually enhance our service functionality for customers and it is their feedback that will determine how we evolve this service over 2010 — which could, of course, include moving towards a full quote-and-buy solution across a panel of providers."

The aggregators appear to have mixed views on the value of pursuing commercial lines, and there is no shortage of individuals ready to point out that services cannot expect to mirror the existing ones — for example, with hundreds of insurers per line of business. Tim Grant, head of distribution at Brit Insurance, is a staunch advocate of online trading for small commercial insurance, claiming 55% of its micro-SME book is now sold online. Interestingly, the insurer invested £7m for a 38% stake in Simply Business' parent Xbridge in 2008. But aggregation for its own sake will not work in commercial and would put customers off, Mr Grant says. "There is a diminishing increase in the conversion rate, relative to the number of providers on a panel. The conversion rate continues to rise but, at a relatively small number of carriers, that conversion rate levels out and there is a disproportionate cost of increasing the number of carriers beyond that point — it's fewer than 10."

So, how many insurers does a good panel make? Ray Vincent, managing director at Transactor, counters: "A viable aggregation model if you talk to the big guys, has to be more than two quotes coming back. In motor it's hundreds, but if you were looking at something obscure, like medical malpractice, three or four will do for starters. You have to put yourself in consumers' shoes but I would say for mass market SME commercial lines, you need 15 to 20 quotes coming back."

Advertising has obviously been the fuel behind aggregators' success, but there is a great deal of scepticism about the preparedness of companies to invest in the kind of above-the-line marketing we have seen so far. Mr Grant adds: "The main beneficiary from the aggregator market is probably ITV. But, given the current status of UK trades, often the premium value of a micro-SME insurance policy is less than a personal motor policy. So that has to be taken into consideration."

Mark Winlow, partner at KPMG, says premiums at this micro-SME end of the market may also present less of an opportunity to create margin without the volumes associated with personal lines. "This is going to require significant investment and I'm not sure anyone has the guts to make that investment yet. Part of this is about the speed at which a return can be made; the premise is good that personal lines aggregators have achieved a good margin already, but I don't see how aggregators can grab a hold of the hardcore of commercial lines business like they have with private motor. The size of the premium and the rewards are marginal, especially in the current marketplace. It isn't a volume play because of the segmentation; it needs quite a lot of specific tailoring for the different trades, so why would you do it?"

Offering a little raw data in response, Mr Vincent suggests the aggregators' cost per acquisition for other lines of business make small commercial a perfectly viable proposition. "If you look at household, the average premium is rock bottom and you see very little hotels, shops or offices with premiums any lower than that. When you get into things like liability and other products further down the food chain, premiums are lower but what generally happens is that CPA charges are also lower. An aggregator's CPA for motor is typically £50, caravan £25, pet £15 and so on."

Pricing dynamics

One of the key factors of any commoditised marketplace is that good value will sell faster. This has been grasped with both hands by the consumer, sometimes to the detriment of insurers, says Keith Hector, commercial distribution director at Axa Insurance. "Insurers must concentrate on their pricing models, which need to be far more dynamic than ever before and capitalise on the hour-by-hour, minute-by-minute nature of aggregation.

"Products are available from an insurer that may have a relationship with 10 brokers, each of which has a panel that is then put through an aggregator. What is effectively one product can often turn out in five or six different forms through as many different aggregator panels. The insurer may have deals with the broker for special rates, some of them may be charging net, some may charge a little commission and this will affect the price. Therefore, that insurer has a challenge to provide pricing models that are sophisticated enough and they need to know when to play the best price. It's been well-documented that most insurers are losing money on private motor where the majority of business is being sourced through aggregators."

Sparking interest

This topic quickly sparks the interest of individuals wearing an IT hat. Julian James, managing director of business development at systems provider Duck Creek, also marks the pitfalls. "One of our clients receives in excess of 10 000 quotes per day and must respond to market and pricing position, sometimes on an hourly basis. To carry out a rate change or a rule change and promote it into an insurer's production system in that type of timeframe is a real challenge — there are still many examples of this process taking 40 working days before it hits a policy administration system. In the aggregator world, that will not work — it's more dynamic, more aggressive and insurers have to be agile and react quickly."

Mr Vincent concurs. "Real-time pricing is the only means of working in aggregation. You can get 150 000-plus quote opportunities in motor and there was no business model prior to aggregation that could produce anything like that volume. Aggregation will find loopholes and shortcomings in underwriting and, if you are underpriced, you are going to sell a shedload before you can even think about plugging the gap."

Depending on who you talk to, commercial lines are becoming more commoditised and at the same time standardised. The wish of distributors is for greater standardisation so that comparison becomes easier still and collaborations like Imarket have pointed the industry down this path. However, internet consumers are a discerning bunch and find being led towards an inappropriate site following a specific search request very frustrating. The aggregators themselves will not invest heavily in advertising until they perceive a margin can promptly return that spend. A quick equation should do the trick; if a market leader like Compare the Market manages 100% convervsion from its expected visitors in 2010 with a £50 CPA charge on every policy, gross revenue could hit £25m. How much investment in advertising and infrastructure will be needed to hit this target is the greatest secret of them all.

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