The recent FCA report into the sale of general insurance add on products made disturbing reading. One of the primary products highlighted was Gap Insurance, especially when sold by motor dealers. The FCA report revealed that consumers were highly unlikely to shop around for comparable products, and that consumers were being overcharged by up to £75 million a year for Gap cover.
The report suggests a drastic overhaul of the process of selling Gap Insurance at a motor dealership, including measures that may see dealers banned from concluding the sale of a Gap policy at the point of sale of the vehicle. Whatever rules the FCA will introduce it is clear that they were quite damning of the current procedures.
So why is it that motor dealers offer such poor value options for the vehicle buyer with Gap Insurance?
Of course the motor dealer will argue that they do not. You will often find the same old excuses given that their products are somehow better than the online independent providers (a point long since disproved by the likes of Which?), or that somehow you are safer buying Gap from the dealer. Of course there is no merit in either of these statements generally. It is interesting that when a motor dealer is challenged on these points, and we have asked several, not one shred of evidence (although plenty of hearsay) has ever been provided.
So what is the truth as to why motor dealers are not competitive for quality Gap Insurance products?
Well it would be simple to say that it is all down to the price they charge, and the high profit margin they aim for. However, whilst this is a major contributory factor, it is certainly not the main one.
Let’s look at the mechanism that makes motor dealer Gap Insurance poor value when compared to independent companies.
1 – Insurance Premium Tax – Insurance is not subject to VAT, but instead its own form of tax in Insurance Premium Tax. The standard rate of IPT in the UK is 6%, and this is what you will pay on a Return to Invoice or Vehicle Replacement Insurance product through any number of independent Gap Insurance suppliers.
However, the story is quite different at a motor dealer. Tax rules state that the motor dealer must charge IPT at 20% for similar products when sold to the customer they sell the vehicle to. This rate mirrors the standard rate of VAT in the UK.
Buying your Gap Insurance from your motor dealer is not tax efficient!
2 – Low volume sales mean poor supply rates – A motor dealer can only ever provide Gap Insurance to someone they sell a vehicle to. This means that if they sell 1000 vehicles a year, and say 300 Gap Insurance products associated with those sales, then those 300 sales will be far too low for them to negotiate a product supply on a ‘wholesale’ scheme with an insurer.
In order to provide the number required to get such a scheme in place, the motor dealer will have to go through an intermediary, such as the manufacturer or a finance company, in order to find a Gap Insurance supplier. This adds another ‘cog in the wheel’ and the intermediary will require a profit margin to be added to the price to the dealer.
The story is quite different with the volume providers of Gap, such as the prominent online brands. These companies can provide the number of annual sales from a typical motor dealer, in just a matter of days. The huge difference in product sales means they can provide enough numbers to have a wholesale deal with an insurer.
Of course this can also allow them to influence the products features in a way a motor dealer may not. This means that the online specialist often have far better policies features too, despite the assertions of your well informed motor dealer!
And now we come to our third point:
3 – Different profit expectations. Lets look at a typical motor dealer RTI product for three years, with the average dealer premium of £399.
The dealer will pay far more for the product through their chosen intermediary. Lets say it is £100.
The IPT rate at 20% equate to £66.50
This means that the motor dealer will make a £232.50p profit on these figures. Out of this figure the salesperson may receive £50 commission, as well as a similar sum for the Finance Manager. This leaves the remaining for the dealership themselves.
Quite often when you compare similar products online you will find them for less than £100 inclusive of everything. So when the motor dealer says ‘There must be some mistake, we can’t even get the Gap for that price’ then they are at least partially telling the truth. There may be no mistake, but because the motor dealer is a low volume retailer of Gap then they simply cannot compete on price.
Online providers are quite different. A lower supply rate, lower rate of IPT, a lower profit expectation and lower business overheads can mean that the very same Gap product can be less than 25% of the cost of the motor dealer one. Of course these companies still manage to make a profit, albeit much lower than the dealers. However the volume of sales will provide a suitable income for these companies to grow, whilst providing much better value to the consumer.
Now the next time your motor dealer tries to tell you that buying Gap Insurance elsewhere is just not as good, you can ask him about IPT, supply rate and commission rates. You may find that your educated approach may see them change their tune very quickly.