The FCA appear to be ready to flex their muscles regarding general insurance ‘add on’ sales in the UK, following the release of their report in March 2014. Parts of the report were quite scathing, in particular the methods and value provided by motor dealers with products such as Gap Insurance.
FCA to change the Gap Insurance market
The FCA have proposed to end the ‘point of sale’ advantage provided to the dealers, meaning that they must allow consumers the chance to access and compare other Gap products in the market, before they commit to buying the product from the dealer. This may mean that dealers have to demonstrate they have informed the customer they could buy the policy elsewhere, or they have to give the consumer a period of days to decide on buying the product or not. This means that they will contact the customer a number of days after leaving the dealership, to get them to confirm whether they want the Gap from the dealer, or not.
The process of buying a new car can be complicated enough (have you even tried understanding a PCP agreement, or even understand how your new registration number works?) , but motor dealers do not enjoy a great position in the open market, with an even playing field. The advantage they have always enjoyed is that they are the first to offer the consumer the Gap product. They also have built a face to face relationship with the customer, and this does build an element of trust. Even if the consumer is aware they can buy Gap Insurance independently (currently there is no requirement for the dealer to inform them of this), the dealer bond can be difficult to break. The issue with this is that the dealer Gap products can be 3, 4 or even 5 times more expensive for the equivalent online products.
It has also been muted that motor dealers will have to provide evidence of the commission they are getting when they sell a Gap policy to a customer. This may see motor dealers reducing their margins quite drastically to avoid unhappy customers feeling they have been ‘ripped off’.
So will motor dealers be able to adapt, and maintain there majority share of the current Gap Insurance market under the new rules? All the indications are that this may be a near impossible task.
Why Motor dealers struggle to provide ‘value’ Gap Insurance products
Motor dealers face major problems if they want to compete with online brands, and we can name a few:
– Restrictive supply agreements with manufacturers or finance companies. Motor dealers, on an individual basis, can only provide a small amount of business to an insurer. This means it is rare that they could even attract the attention of a reasonable insurer to supply them directly. For this reason they have to form a collective business through an intermediary, such as a finance company or the manufacturer. Under this collective umbrella they can get Gap product supply, but by adding a further cog to the wheel, the intermediary will inevitably have some financial commission built into the product they supply to the dealer.
– Insurance Premium Tax. Most motor dealers do not even realise, but you have to pay a higher rate of Insurance Premium Tax when you buy a Return to Invoice policy through the motor dealer. The standard rate you pay is only 6%, and this would be the case with the online brands, but it would rise to 20% is you buy most Gap products from the showroom you buy the vehicle from.
– Outdated commission structure. A typical motor dealer 3 year Return to Invoice product may be charged to the customer at £400. This will cost the dealer around £100, and will include around £67 in Insurance Premium Tax. This leave a whopping £233 in commission for the dealer to use. Often the car salesperson themselves will get £50, and the Finance Manager may get a direct cut too. This will still leave the dealership with something like £150 commission on a policy that may have cost them £100. If you compare this to an online provider, they will have a volume deal in place direct with the insurer, and often you will find the equivalent policy they will provide to the consumer for less than £100. That is a retail price for less than the motor dealer can even buy it in for.
Looking at these factors, and they are by no means exhaustive, the dealers can clearly look at improving the last issue. By cutting down their commission expectations then they will provide a far better value product to the consumer.
They cannot do much about the Insurance Premium Tax issue, and it is unlikely the Government would reverse this either.
The first issue is an interesting one. Many independent Gap Insurance providers find it difficult to break the stranglehold of the manufacturers for Gap Insurance supply. However, if they could supply direct to the dealers then there may be a much better choice and end value to the consumer. Whether this will happen will remain to be seen. The tide of people buying Gap Insurance away from the motor dealer does look set to increase dramatically.
There is little doubt that motor dealers will have to change their ways in the coming months, if they hope to even come close to competing with the independent Gap Insurance providers in the UK today. The end result of lower premiums and better choice has to be a great outcome for consumers though, and the FCA seem determined that this will happen.