The upcoming FCA proposed changes to how motor dealers can provide ‘point of sale’ Gap Insurance can only be a good thing for the UK consumer. By ensuring vehicle buyers are aware that there are alternatives in the marketplace, and allowing them time to explore these options, will help consumers to make the most appropriate decision for themselves.
In truth, the FCA findings on the way in which Gap Insurance products are sold in motor dealers did not put those dealers in a great light. For example, an astonishing amount of customer who apparently ‘bought’ Gap Insurance from there motor dealer were not even aware that they had done so, even within a very short period of concluding the sale. The FCA proposal of banning ‘opt in’ insurance sales should put pay to assumptive sales tactics by dealers, and the end to additional products simply being ‘included in the deal’.
The FCA report highlighted the fact that only around 10% of the average Gap Insurance premium ends up being paid out in a claim. The FCA report also hinted that the vast majority of Gap Insurance products are still sold by the motor dealer, and with the typical motor dealer 3 year Gap product at £400, then this may equate to £40 being paid out in claims. However, with a typical independent 3 year Gap product at around £100, then the very same claims costs, for the same cover, and the same vehicle, will only result in the same £40 being paid out in a claim. It is clear that any shift from the sales of Gap products from the motor dealer to independent providers will provide infinitely better value for the consumer.
However there was one issue with buying Gap Insurance from the motor dealer that has not been heavily publicised, that has a substantial effect on the value for money to the consumer. That is the disparity in the rate of Insurance Premium Tax.
You see with insurance there is no VAT, instead a different tax called Insurance Premium Tax, or IPT for short. The rate of IPT for most policies in the UK is 6%, and this is the rate charged by independent brands for typical Return to Invoice or Vehicle Replacement Gap.
However, if you buy the same type of Gap product from your dealer then the story is quite different. The motor dealer is legally required to charge 20% IPT, otherwise known as ‘Higher Rate’ Insurance Premium Tax.
So if you compare a typical motor dealer product at £400, then you are in fact paying nearly £67 in Insurance Premium Tax alone. Remember the policy may only around £40 of the premium may end up being allocated to claims!
If you buy your Gap Insurance from an independent source, then the standard 6% IPT rate is charged. This means on a typical £100 premium only £5.66 is paid in tax on the purchase. That is quite a saving.
Whilst the inferences from the FCA findings may be that motor dealers charge far too much for Gap Insurance, and indeed the margins are far higher even taking in to account the disparity in tax, it is not the whole story.
However, there is little doubt that if you are looking for the most cost effective way to buy Gap Insurance, you can avoid paying the higher rate of tax if you buy from an independent provider, and not the supplying motor dealer.