If you have ever been quoted for Gap Insurance by your motor dealer, and then compared that with the prices you can find with an independent provider then one question will always come to mind……………
Why is Gap Insurance so expensive at motor dealers?
We got a quote from a Franchised motor dealer for a brand new vehicle at £14500, for three years at a £10000 claim limit on a Combined Return to Invoice basis. We were quoted a £399 premium. We checked for an equivalent policy online, found one underwritten by exactly the same insurer, and the cost was a quite eye watering £69!
Why such a difference in price? Well we will give you the reasons why this may be the case.
1 – Insurance Premium Tax
The tax levied on insurance is not VAT, but Insurance Premium Tax. If you buy a typical Return to Invoice policy at a motor dealer, you will pay the higher rate of 20% Insurance Premium Tax. If you buy the equivalent policy independently then the rate of IPT is the standard 6%.
2 – Insurers costs
This is the net cost that the insurer charges for the policy. This will cover the cost of claims, and leave (hopefully) a profit for the insurer.
Now you may think that these charges would be the same for both the independent provider and the motor dealer. However, if the motor dealer only provides a small number of policies (remember they are restricted to only providing Gap Insurance to the customers they sell a vehicle to) then they may not be able to secure the lowest supply rates based on low sales volumes.
3 – Intermediary costs
A ‘stand alone’ motor dealer may not be able to secure a direct supply agreement direct with and insurer or distributor, simply based on low sales volumes of Gap Insurance. This means they may have to take the route of a collective supply agreement through and intermediary. These can include the franchise manufacturer, a finance company or the motor dealer group (if they are part of a chain). This extra cog in the wheel may well include an extra layer of costs.
Independent Gap Insurance providers are much more likely to provide the volume of business for direct agreements with insurance distributors. Indeed some of the larger volume independents may have agreements with more than one insurer. Often this means no need for an additional intermediary, and the associated costs.
4 – Salesperson Commission
A traditional commission ‘carrot’ in motor dealers has been the sale of additional products such as Paint and Fabric treatments, extended warranties, finance and of course Gap Insurance. These additional commissions are often built into the cost of the premium. Of course the commission structure in a motor dealer can extend beyond the salesperson, with the Business or Finance Manager, and even the Sales Manager often seeing commission payments extended into their pay structure.
Often independent providers do not have such commission structures in place. Of course the overall business income has to pay for an employees salary, but the overall business model of independent providers can see a much lower reliance on large commissions per sale.
5 – Dealer/Broker Profit
This is the amount of money, within the premium charged, that the motor dealer, or the independent provider, will keep as their profit on the sale. It is often raised that it is far cheaper to run an online insurance broker than it is to run a motor dealer. However online providers cannot rely on ‘walk in’ customers like a prominently positioned franchise motor dealer can. Online marketing costs can be substantial with some budgets running to hundred of thousands of pounds per annum for ‘pay per click’ marketing on the search engines.
However, the volume of business that online providers can achieve, they often are happy to work at much lower profits per policy than a motor dealer may.
It pays to shop around
The upcoming and much anticipated FCA rules changes for the sale of product like Gap Insurance will probably encourage consumers to check the market. As you can see there can be substantial savings seen for equivalent products away from the motor dealers.
How will motor dealers react if they see a drop in Gap Insurance sales? Only time will tell, but ultimately the consumer should see access and awareness of much better value products much easier in the future.