Analysis: How most favoured nation clauses fell out of favour

If the CMA’s findings are finalised, Compare the Market could be fined up to 10% of its annual worldwide group turnover.

So-called ‘most-favoured nation’, or MFN, clauses stipulate that insurers must provide price comparison websites with the best price on their products, prohibiting them from offering cheaper insurance on their own websites to customers who come to them directly.

The clauses that have attracted the attention of the competition watchdog in the case of Compare the Market’s contracts with home insurers are termed ‘wide’ MFN clauses, since they bar providers from offering the same or better prices not only on their own websites, but also on other PCWs.

Conversely, clauses that only prevent an insurance provider from selling the same cover more cheaply through their own proprietary distribution channel are called ‘narrow’ MFN clauses. While these are outside the remit of the ongoing CMA investigation, the return of the issue to the spotlight has prompted questions about their effect on competition.

Wide MFN clauses

Wide MFN clauses were the focus of an investigation the competition watchdog – then the Competition Commission, to which the CMA is a successor organisation – carried out in relation to the private motor insurance market. The investigation found that the clauses were having an adverse effect on competition.

In setting out remedies to this, the CC drew a clear line between wide and narrow MFN clauses, prohibiting only the former.

It also said that it had avoided taking action on narrow MFN clauses due to the implications for PCW’s business models: “We have significant concerns that a prohibition on all MFNs would threaten the existence of PCWs. Without ‘narrow’ MFNs, consumers could search for policies on a PCW but then might be able obtain the chosen policy more cheaply by visiting the insurer’s website directly, and the PCW would not be rewarded for the service it had provided.”

Compare the Market’s use of wide MFN clauses in its contracts with home insurance providers came to the attention of the CMA during its market study of PCWs, which it calls digital comparison tools, or DCTs.

An investigation was opened in September 2017. In November 2017, Compare the Market contacted home insurance providers to inform them the clauses would no longer be enforced and would be removed through the contract renewal process. However, alongside notice of its provisional findings, the CMA voiced concern that the effect of the clauses could continue.

Setting out its position on wide MFNs in the report that the market study produced, the CMA said they were “likely to be anti-competitive”, expressing concern that they could lead to higher prices for consumers by softening competition between comparison sites.

Specifically, it voiced concern that wide MFNs made it less likely that aggregators would compete on the commission they charge to insurance providers: “Wide MFNs effectively stop this competitive process by creating a price floor across DCTs. A DCT cannot gain a competitive advantage by lowering its commissions as any subsequent price reduction would also benefit its rivals with wide MFNs.

“In addition, DCTs with wide MFNs can increase their commissions without the fear that they become more expensive than their rivals, as any price increase by the suppliers would need to be reflected in price increases on rival DCTs.”

Following an analysis of commission fees in relation to the use of wide MFNs in the private motor insurance market, the CMA estimated that commission was between 3% and 4% higher when a wide MFN was in place “than they otherwise would have been”.

Even before the regulator prohibited them, wide MFNs had fallen out of use in the wider insurance market, Confused having removed the clauses in late 2012, while Compare the Market and Go Compare followed suit by mid-2015. Money Supermarket had only ever used narrow MFNs.

Views garnered in the course of the CMA’s more recent study suggested that the impact of the ban had been mainly positive: “Many of the suppliers who provided views said they had been able to negotiate exclusive deals and set different prices on different DCTs.”

The reception from insurance providers wasn’t unanimously positive, with some telling the CMA the ban had made no impact or even a negative impact. This was because the effects of wide MFNs were simply replicated through the use of narrow MFNs, or because narrow MFNs were introduced where there had previously been no MFNs at all, constraining providers’ pricing on their own websites in a way it hadn’t been before.

Narrow MFN clauses

The British Insurance Brokers’ Association have called for the CMA to take action on narrow, as well as wide, MFN clauses.

It argues that since products sold through aggregators are subject to a commission fee or cost-per-acquisition – which in some cases are as high as £160 – the prices on offer on their own websites are artificially inflated, on account of them not being able to go below the price floor imposed by narrow MFN clauses.

In a response it submitted to the CMA, it said: “Many Biba members would like the opportunity to offer the same product on their own website at a discounted rate, however are hamstrung in their ability to do so by these damaging clauses.”

The AA also expressed frustration. A spokesperson said the ban of wide MFNs had “inadvertently supported narrow MFNs which hamper insurers in presenting better prices on their own websites – which is a much cheaper form of selling.

“As a result, some insurers have sought solutions such as offering a more comprehensive product direct in order to differentiate for customers who purchase direct.  Insurers are generally frustrated as this stops them presenting a price commensurate with risk and cost of acquisition for new customers.”

However, PCWs defend the use of narrow clauses. Louise O’Shea, CEO at Confused, said: “We do use narrow MFN clauses, which are not anti-competitive. Narrow MFNs ensure that our insurer partners provide us with their best price so that we can help customers make a fair comparison.

“If we weren’t able to make this best-price offer to our customers it would make a mockery of the comparison model as they wouldn’t be able to easily compare insurers’ best price like-for-like. As a result, shopping around for car insurance would revert back to being a confusing and onerous task, which could ultimately stifle market competition and drive prices upwards.”

Though their investigation of Compare the Market is unlikely to yield action on narrow MFNs, the clauses remain of interest to the CMA. In the market study of comparison sites, the regulator noted that narrow MFNs were justifiable but also said: “In situations where narrow MFNs apply more broadly than is necessary for achieving the efficiencies they can bring, we have concerns about them.”

One of those justifications is, as Confused’s O’Shea alludes to, the business models of aggregators would be undermined if they couldn’t guarantee an insurance provider’s best price to consumers.

Biba has taken issue with this point, saying it “finds it inappropriate to allow anti-competitive practices to remain, purely to favour one type of distributor over another, disrupting an effective market from taking place”.

The defence from comparison sites is that, without narrow MFNs, the direct channels of insurance providers would effectively be free-riding on the public profile and advertising spend of aggregators if customers knew they could compare prices and then head to the provider’s own website for a policy without the cost added for commission.

It isn’t an argument that Frank Speight, commercial director of insurtech start-up Honcho buys, pointing out that aggregator’s ad spend is paid for by commissions, and so in turn, by the consumer.

“If Compare the Market, Confused, or Go Compare are fantastic channels for me,” he continued, “and I want to work exclusively through them, I might get lots of business and absolutely love it – what’s the problem?

“But if I want to operate via multiple distribution channels – which may strategically make sense for my business – there’s no reason why I should not be allowed to do that, nor why I should not be allowed to offer different prices via different channels, because different channels have different cost structures.”

Culture of fear

The problem for insurance providers is that, though they may feel that comparison sites limit the competitiveness of their direct channels, they simply cannot afford not to sell their products through aggregators. A study by Kantar found that in a sample of over 4000 internet users, 85% had used a comparison site and 71% had used one in the last year. This has given rise to what Biba has dubbed a ‘culture of fear’.

Biba told the CMA that its “members have reported DCTs threatening to ‘turn off’ service with insurance providers when they have raised issues, creating a real, tangible imbalance in negotiating power needed to effect a fully functioning market”.

In its submission to the CMA, Biba noted the reluctance of brokers to openly criticise comparison sites, having received statements from members saying: “we could potentially be committing ‘commercial suicide’ being associated with such information” and “absolutely agree that this appears to be the case but wouldn’t want to be quoted as such.”

The asymmetric relationship between PCWs and insurance providers was also attested to by Speight: “MFN clauses, wide or narrow, should not be looked at in isolation. They are just one part of the overall dynamic between the PCW channel and insurance providers.

“PCWs were the original disrupters, but in the immortal words of Oasis, ‘some might say’ it’s now a case of the tail wagging the dog due to their market dominance. The overall balance of power is not equitable, and that’s why they’ve been allowed to get away with the commercial contracts that have evolved over time. MFN clauses are merely a symbol of that historic relationship.

“From an insurer provider perspective there is a risk of incurring the wrath of these giants, because whoever does so, risks a temporary loss of market share in order to regain strategic control and truly independent pricing that benefits consumers. On the other hand, we all know what happened when David took on Goliath.”