The recent FCA report on the General Insurance ‘add on’ market in the UK did provide some fantastic insight into the motor Gap Insurance market. It was stated that the Gap Insurance market is worth around £150 million per annum in the UK. If we assume that the average premium for the product is £300 then that would mean around 500,000 Gap policies may be sold each year.
For a product that is often poorly understood then that is quite some figure!
FCA Gap Insurance concerns
The FCA highlighted that the current system in which Gap Insurance is sold, is far too heavily influenced by the motor dealers. This means that competition and comparison is poor for the consumer. The FCA have highlighted several options to redress this balance, all of which are aimed to ensure the consumer is able to assess the market, and all their options, before committing to any particular Gap Insurance product or provider.
So why are we confident that the outcome will be that consumers will buy their Gap Insurance away from the motor dealer?
Well the model and mechanism of purchase at a motor dealer is much more costly than buying from an independent expert. We will explain why.
1 – Costly distribution network. Gap Insurance sales have always been dominated by motor dealers. They have enjoyed the ‘first shot’ advantage at selling these products for many years. Indeed it has only been in recent times that independent insurance brokers have begun to offer the Gap products direct to the public.
The motor dealers are restricted to selling Gap Insurance to their own customers. This small amount of policy sales means that they will not get direct supply underwriting from an insurer. Instead they have to go through a supply network, such as the manufacturer or a finance company. This extra ‘cog in the wheel’ will lead to a higher supply cost to the motor dealer. This is inevitably factored into the end premium to the consumer.
2 – Higher Tax charges. If you buy Gap Insurance from an independent brand then you will only be subject to the standard rate of Insurance Premium Tax at 6%. If you buy from the motor dealer, then a Return to Invoice policy will invoke a 20% Insurance Premium Tax charge.
3 – Higher commission built in. If you buy any insurance from your insurance broker then they often only contain a small percentage commission charge. If you buy from your motor dealer, then the percentages are out of the window.
An example of how a motor dealer Gap premium at £399 is made up would be:
£100 supply cost
£66.50 Insurance Premium Tax (based on 20% at £399)
£50 sales person commission
£50 business manager commission
£132.50 dealer commission
Remembering that the independent broker will have a lower tax level built in, as well as a better supply cost and a lower commission, it is common that the equivalent policy to purchase may be less than £100.
The FCA seem quite aware of the huge disparity in value between the motor dealer and the independent brands. The new governing body seem determined that the motor dealer will no longer be able to sell Gap products without enabling the consumer to compare their options online.
This will inevitably see more any more consumers seeking the infinitely better value Gap Insurance widely on offer away from the motor dealer in the future.