It is a question that comes up time and time again. During the process of buying a new vehicle, your motor dealer provides you with a quote for Gap Insurance. Now you may have not even heard of Gap Insurance before, so you may take the usual step of researching it on the internet. This will lead you to one very clear conclusion, the prices charged by a typical Gap Insurance product is far cheaper than the premium your motor dealer may have quoted. In some cases the motor dealer Gap can be four or five times more expensive than the prices you can get on the internet.
How can this be?
Well before we get into those reasons, let is dispel on of the often given excuses by motor dealers in that ‘You have to be careful with online providers they often go bust, do not pay out, do not cover you for the same (take your pick).
The leading independent Gap Insurance brands in the market have been established for a number of years. They also share underwriting (remember it is the insurer who authorises your claim) with many of the leading products you may find in your car showroom.
Whilst it may be true to say that many of the online brands may have started out as ‘one or two man bands’ with an eye for a gap in the market (excuse the pun), many have now progressed and invested. These brands are bone fide and successful businesses (you can check this with companies house), have multi million pound turnovers and employ key and specialist staff to match this growth.
The products also have passed independent scrutiny from the likes of Which?, and the online brand often include features such as deferred start dates and the ability to transfer your cover. These features are not present with motor dealer products on many occasions.
So the message is that the online providers are easily verified as solid businesses, and the products are at least as good (and that may be over generous to the motor dealers) as the products you are offered in the showroom.
Why is motor dealer Gap more expensive than online brands?
So if the Gap products at the dealers are no better, then why four times the price?
Three simple reasons:
1 – Insurance Premium Tax. You pay the higher rate of 20% Insurance Premium Tax when you buy your Gap Insurance from your motor dealer. Buy it independently and you will only pay the standard rate of 6%.
2 – Less competitive supply rates. Your motor dealer can only ever sell a Gap Insurance product to someone they sell a car to. That means that they may only sell a few hundred policies a year, and this is no where near enough for them to get their products direct from an insurer in the majority of cases.
An independent brand is not hampered in the same way. As they will provide tens of thousands of product sales each year then insurance providers will be much more interested in the business they provide. This means that they will get far better terms direct with an insurer, and this could be both in product features (where they will have a direct influence) and in cost per policy also.
Motor dealers normally have to get there Gap products through an intermediary, perhaps the manufacturer they are a franchise for, or a supporting finance company. This intermediary will also have a profit margin in the products they provide to the dealer, no doubt, and this cost must be borne by the purchaser.
3 – Different profit expectations. Your motor dealer sells Gap Insurance as a secondary product, and as such the only profit margin they can make in from the price they sell their limited number of products at. An online provider will have the benefit of ‘economies of scale’, and may have extra bonuses in the volume of business they provide.
You may also find that the salesperson who sells you the Gap Insurance in the dealer may get paid £50 for selling the product, the Business Manager may get a percentage of the retained commission and the dealership will keep a margin for themselves also. A typical £399 motor dealer Gap product may have over £200 margin left in it, even after taking the higher tax rate and higher supply cost.
So overall you can see that there are many reasons why motor dealer Gap products are so expensive. None of them are down to quality or security, and unlike the motor dealers reasons you can verify all these factors are true.