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Direct Line is now on price comparison sites – what does this mean?

Direct Line is now on price comparison sites – what does this mean?

Thursday 11 July 2024 06:00

Photographer: Hollie Adams/Bloomberg via Getty Images

Direct Line was the last major individual insurer to resist the lure of price comparison sites.

He has even turned his stubbornness into a sort of USP, incorporating it into many of his TV commercials and online marketing.

By doing this, he argued, the transactional interface between the brand and its customers is eliminated, allowing a closer relationship to be maintained.

More sceptical observers will add that staying away from sites such as Confused.com and Go Compare also allows the struggling FTSE 250 insurer to avoid the high commissions they carry. It has been found to vary between 18% and 25%..

For years it remained one of the only mainstream insurers to resist the temptation of the sites, which 90% of customers use as their first port of call when signing a new policy. Even other insurers within Direct Line – including Churchill and Privilege – have featured on the sites, proving that the group’s flagship brand is the exception that proves the rule.

But now, all that is set to change, as on Wednesday’s capital markets day, the UK’s second-largest insurer announced that Direct Line policies will start appearing on the likes of Compare the Market and Moneysupermarket.

It said the new leadership team “has a proven track record of delivering growth through PCWs” and that this will help us achieve our ambition to “rejoin the pioneers in UK motor insurance and deliver sustainable profitable growth”.

How did we get here?

The last two years have been particularly challenging for the personal insurance sector, which consists of policies in areas such as auto, home or pet insurance sold to individual customers.

The delay between people taking out a policy and a potential claim makes them particularly vulnerable to the kind of rapid inflation we’ve seen in late 2022 and much of 2023.

As the industry adjusted to the economic upheavals of Russia’s war in Ukraine, parts and labor costs skyrocketed. Combined with bad weather and people’s more adventurous habits as they awoke from quarantine, the perfect storm created: both the number of orders and the cost of meeting them have soared.

In fact, EY estimates that for every pound insurers received in premiums, they paid £1.11 in claims and operating costs in 2022, and £1.14 in claims and operating costs in 2023.

But among the many personal insurance giants in the UK that have struggled in the tough operating environment of recent years, Direct Line has had a particularly tough time.

Shares in the group, which also houses breakdown recovery firm Green Flag and motor insurer Darwin, fell by more than 50 per cent between February 2022 and March 2023 in response to a series of profit warnings. The share price fell from 300p to 137p in a year but has since recovered to 199p.

In January of last year, the board asked then-CEO Penny James, who took over the helm in 2019, to step down. And the following July, FCA has been ordered to review five years of claims after admitting it underpaid some customers whose cars or vans were totaled.

It was then forced to bail out of a “highly opportunistic” mega offer from Belgian insurer Ageas earlier this year, valuing the firm at £3.2bn.

What does it say about the insurance industry?

Insurance industry observers tend to generally agree that many of the acute issues that emerged in late 2022 have begun to abate. Insurers have boosted their companies’ profits by raising prices significantly, with the average premium rising 58% in 2023.

While more chronic problems persist, such as the increasing complexity of cars and the impact of the climate crisis on severe weather events, many of the industry’s giants appear to be recovering, and Direct Line is no exception.

Already announced Sale of part of its commercial arm in September last yearThe firm announced a major cost-cutting drive in March, targeting annual savings of £100m, and opened the door to a return to dividends. Its share price is up 14% since the start of the year.

What other changes did Direct Line announce?

As well as its plan to appear on price comparison sites, Direct Line has also detailed the rest of its transformation plan, the main theme of which is a return to basics.

The company will focus its investments on its core insurance lines (motor, home and Direct Line for Business commercial insurance) and gradually phase out its smaller pet and travel insurance lines.

Russ Mould, investment director at AJ Bell, said of the update: “Direct Line is finally giving in and putting its motor insurance policies on price comparison sites. It’s a big change and a significant event for the company.

“Direct Line is effectively saying it can no longer ignore the comparison site channel. It may see an increase in customer volumes, but earnings for those policy sales will inevitably be lower. This could have a negative domino effect on dividend payments to shareholders.

“The company has been hit by adverse weather events and wars in recent years, which has led to increased demand, while cost inflation has made resolving issues significantly more expensive.

“On top of a weak balance sheet, the business has been set on course. Now it is stepping back and big decisions need to be made, even if that means a radical change in the business model.”