First published in ITIJ 88, May 2008
The popularity of Web-based cost comparison sites throws up various issues for travel insurance purchasers and sellers. Stewart Farr goes online to see what the deal is
The boom in Internet usage and the resultant development of cost comparison sites has boosted competition and driven down prices across a range of products, including travel insurance. Overheads are lower in a virtual environment, so the best rates on insurance and other personal finance products are frequently restricted to online deals, but is the travel insurance industry best served by cost or price comparison websites? Is the consumer clearly a winner or does the emphasis on price distort the true benefits picture and result in the purchase of inadequate or less-than-comprehensive policies?
Many consumers, no doubt encouraged to do so by the constant exhortations in weekend and other personal finance media, now automatically go online to check and compare prices. At the same time, product providers cannot ignore the importance of good Internet deals topping the best-buy tables. Another consideration is that customers who go online tend to be the big spenders and the vocal complainers, the type who are best kept happy.
Concern has recently been voiced in the UK, however, that price comparison websites are misleading consumers into buying unsuitable insurance products. Despite previously rejecting calls for regulation, the country’s Financial Services Authority (FSA) has now decided to review the situation, prompted by recent research showing that such sites are confusing and potentially misleading.
Price comparison websites, run by the likes of moneysupermarket.com, confused.com and uswitch.com, account for an estimated 50 per cent of the UK’s general insurance market and attract 15 million users a month. However, research commissioned by the British Insurance Broker’s Association (BIBA) found that the sites routinely make assumptions about users that could lead to inappropriate quotes. From the users’ perspective, the research revealed that over half of insurance buyers interviewed did not fully understand the differences between each insurance policy offered via comparison websites. Only six per cent of users believed that the details of what the policy covered and did not cover were fully explained, and 84 per cent maintained that policy details offered via comparison websites could be confusing. The research also indicated an overwhelming consensus of 93 per cent of consumers expect comparison websites to be regulated in the same way as insurance intermediaries.
Price comparison websites ... account for an estimated 50 per cent of the UK's general insurance market and attract 15 million users a month
BIBA chief executive Eric Galbraith noted: “The current FSA rules were written prior to the growth in aggregator sites. I believe the regulator should now look again at developing more appropriate regulations to ensure consumers are being afforded suitable protections. There are still too many people logging on and making a decision solely based on the price of a policy, rather than the protection it offers them, and potentially buying an inappropriate policy.”
The FSA is conducting an ongoing investigation into all financial advertising on the Internet, but currently only certain elements of price comparison websites’ business fall under its auspices. Nevertheless, an FSA spokesman reportedly said: “We have considered this issue before and decided then that no action was needed. However, in light of the new BIBA research, we will undertake a further investigation … (and) consider whether we should intervene by rule changes or other regulatory action.”
Web versus agent
The managing director of comparison site gocompare.com observed that such websites have been a force for good in terms of transparency, and commented that ‘people find insurance confusing whichever way they buy it’. This may explain the fact that, according to research by Sainsbury’s Finance, around one in three holidaymakers purchase their travel insurance through the travel agent or company selling the holiday, even though it can often be two or three times as expensive as buying stand-alone cover. People likely purchase travel insurance in this way because it is convenient and easy. What price do you put on the possible hours wasted in researching and trying to get a fix on the best quote from online travel insurers? It’s not surprising that comparison sites are successful; consumers believe all the research has been done for them, they are comparing like with like and they just have to decide on price.
Are customers, however, getting a better service, and being offered a more suitable policy by purchasing their holiday cover from their travel agent? The sale of stand-alone travel insurance policies has been regulated by the FSA since 2005, but policies sold as part of a package holiday by a travel agent or tour operator do not currently fall under this regime (with the exception of Thomas Cook, an appointed representative of AXA Insurance). The FSA rules require anyone selling travel insurance to ask certain questions to check the suitability of the policy offered, including a key set of questions concerning pre-existing medical conditions. Travel agents, though, do not come under this jurisdiction.
Subsequently, consumer champion Which? has, in the past, accused some travel agents and tour operators of mis-selling travel insurance. A year ago, its survey of 24 agents found that only 35 per cent asked medical questions, and just 19 per cent explained what the policy covered (in both cases banks and insurers scored a comparative 81 per cent). Not one travel agent explained what the policy did not cover, whilst 56 per cent of banks and insurers did.
In response, the Association of British Travel Agents (ABTA) maintained its own research indicated that 82 per cent of those buying travel insurance through an agent or tour operator were asked about pre-existing medical conditions, compared to 84 per cent through brokers and other channels. It further warned that if travel agents stopped selling travel insurance there was the possibility that more people would travel without any insurance at all. Either way, the rules are set to change from January 2009, when all travel insurance sales will be regulated.
Seeing through the competition
Research does suggest, though, that travel agents’ policies tend to cost more than those sold by insurers, banks and brokers. Financial analyst Defaqto found, on average, the cost of insurance for a single trip worked out at 91.8 per cent more from travel agents compared with the most competitive ‘best buys’ in the market, and 15.5 per cent more than the market average. The best buy concept, as espoused by comparison websites, has not met with complete approval within the insurance industry, however. Direct Line, for instance, last year attacked online price comparison services, claiming that they were not accurate, independent or comprehensive. Moneysupermarket.com, among other sites, viewed this as sour grapes; director Richard Mason said: “Sites such as ours have changed the way people shop for insurance and as a result Direct Line has lost market share. Consumers can draw their own conclusions about why Direct Line refuses to participate with the various comparison sites. It may be that they don’t want consumers to see how uncompetitive their prices really are.”
For its part, the insurer claimed it simply wanted to reassert its marketing position of always cutting out the middleman. Said Roger Ramsden, strategy director of insurance, Royal Bank of Scotland (owner of Direct Line): “These comparison sites are just that (middlemen); they stand between the consumer and the insurer and there is a cost for this service, although it is not always transparent. By their very nature, these sites are focused primarily on price.” He added that his company offered unique benefits that couldn’t easily be conveyed in an online best-buy table.
93 per cent of consumers expect comparison websites to be regulated in the same way as insurance intermediaries
Price comparison sites often give consumers the impression that they trawl the entire market to find the best travel insurance quote, but this isn’t necessarily the case. Also, according to research conduced by Direct Line, more than a third of consumers (38 per cent) do not realise comparison sites receive commission payments from the insurers listed. A frequent belief is that many sites cover their costs through the sale of advertising space or that they are offering a free information service. All the main sites received fees or commission payments from the companies listed, the payment usually being made if a customer clicks through to the insurer’s own website and buys a policy.
Should the size of these payments and fees be disclosed? moneysupermarket’s Mason believes not, saying that the site is upfront about the fact that it is a commercial organisation. “The fees we receive do not influence how we present information. If they did, consumers would not use us and that would be far more detrimental to our business.”
What’s so confusing?
Consumer confidence can be further eroded when the final premium offered turns out to be substantially higher than the price quoted in the best-buy table. Comparison sites require users to complete a detailed questionnaire if a tailor-made quote is required. Using this information, the site then searches through its roster of insurers to find which provides the cheapest quote for the particular circumstances listed. However, different insurers have different underwriting processes, with varying exclusions and excesses, so a standard questionnaire might not exactly fit with the insurer’s own application form. Thus, when the purchaser goes through to the insurer’s website and fills out it’s own quotation form, often the result is a higher premium or lower level of cover, and not a best-buy, leading to a disillusioned or confused customer. Comparison sites, however, argue that their initial quotations should always prove to be subsequently accurate provided the customer does not change any details when completing the insurer’s own form.
If travel insurance price comparison websites are viewed as confusing then the blame surely rests with the travel insurers. The level of cover offered can vary dramatically between insurance plans and insurance companies. Why need this be, given that the underwriting process, although individually geared to specific company objectives, should still conform to basic insurance parameters? The rush to provide the cheapest level of cover may find appeal with the consumer, but the small print of conditions and exclusions necessary to achieve that low cost has a tendency to backfire where marketing image is concerned.
On the face of it, to the consumer, a payment of as little as £5 for single trip travel cover seems a good deal, but this policy could be virtually useless after taking on board the potential multiple excesses, the low single item limits, the lack of trip cancellation cover, exclusions of the most common types of injuries, exclusions of cover for items valued over a specific amount, and the strict interpretation of ‘existing conditions’. Not surprising then that nearly 10 per cent of all complaints received by the Financial Ombudsman’s Service (FOS) concern travel insurance.
The FOS believes part of the problem is because travel insurance has not kept up with changing holiday fashions. Spokesman David Cresswell was reported last year as saying: “We get a lot of disputes over terminology. People engage in activities on holiday such as riding a scooter, surfing or bungee jumping, which they do not consider as dangerous sports. Unfortunately their insurers do.”
The Government, as well as consumer groups, is worried that people do not understand what they are and are not covered for. The general mood is that travel insurance is selling customers short. Last year’s report form the Treasury Select Committee expressed concern that 10 million holidaymakers would not be able to pay for medical treatment if they were caught up in a terrorist attack, because their policies excluded this cover. (According to the Association of British Insurers, about half of the policies in the travel insurance market cover medical expenses caused by a terrorism event.) The committee also identified poor wording and definitions as a significant problem, and advised travellers never to rely on imprecise or unclear policy descriptions. Its report concluded: “The insurance industry, those who sell travel insurance, the Government and the FSA must work together to develop insurance policies that are summarised in plain English, that provide clear and prominent information on exclusions and that are promoted in such a way as to maximise the number of holidaymakers with proper coverage.”
Clear policy summaries are certainly a step in the right direction with regards to driving home to the consumer what their policy covers them for, but with so much emphasis still given to the marketing of cheap travel insurance, are insurers really giving the right impression? Cost comparison sites for travel insurance distract from the priority that should be given to quality of cover. At least confused.com takes the user through a list of assumptions regarding the cover provided and the customer himself before even allowing them through to the quotation page, but all too often such sites lure customers in with promises of savings, whilst providing insufficient information regarding coverage inclusions and exclusions, and instead leave the user confused, and potentially with an unsuitable policy.