First of all may I wish you a happy new year from everyone at GapInsuranceTV! Now the fireworks have gone out and the Christmas decorations have been put away (well nearly), its time to look forward to the new year.
In the world of Gap Insurance, 2014 could see the landscape of the market forever.
The FCA report into Gap Insurance is due in 2014
The current FCA investigation into the sale of ‘add on’ products is due to be finalised in the coming months, and its findings could see huge changes in how Gap Insurance is sold.
The FCA have stated that the investigation is aimed to look at competition in the market, and to assess the availability and access of appropriate products to consumers. Although it has been reported in the media that the FCA investigation could herald a surge in ‘miss sell’ complaints, the body has made it clear they are not looking at either premium prices or looking to punish poor individual sales processes. The aim, it would seem, is a more general view on ensuring the market can provide enough choice and competition for consumers.
At this stage of course, it is impossible to know exactly what the findings may be, but the FCA asked some time ago for evidence from interested parties regarding the market. This gave insurance providers and motor dealers the chance to put their view across to the FCA, and a number of leading companies and organisations in the market have done so.
However it does appear to be clear that the FCA expects companies to put consumers at the heart of the business, not profit. This was highlighted in 2013 when they fined Swintons for their failing in selling ‘add on’ products to its customers.
Opposing views on the Gap Insurance market
At GapInsuranceTV we understand that a body representing a large number of motor dealers in the UK provided a view that the Gap Insurance market was fine as it was, and citing the following reasons for this assessment:
Consumers spend more time on the internet, and less time in motor dealers when arranging the purchase of a vehicle. This means they will spend time on looking at the ‘add on’ products they require, including Gap Insurance.
Consumers know all about Gap Insurance, and where they can buy it.
Gap Insurance products in motor dealers are quality products, this is because the rate if claim rejection is low.
The details we found also described the types of Gap Insurance products in the market, namely Finance Gap, Return to Invoice Gap and Vehicle Replacement Gap. However, there were a number of errors found in these descriptions, namely:
Vehicle Replacement Insurance is only available for new cars.
Vehicle Replacement Insurance will ” cover the difference between the insurance settlement figure and the amount needed to replace the vehicle with a brand new car of the same make and model.”
Of course Vehicle Replacement Insurance will provide the policy holder with the amount needed to replace the vehicle with the equivalent model to the one first purchased, NOT necessarily a brand new model. If the VRI policy is purchased to protect a two year old vehicle, then it would be the cost of the equivalent two year old vehicle that can be protected. If a policy bought for a two year old vehicle would provide cover would provide the funds for a brand new equivalent then the policy holder would gain significantly from any claim. This could break the rules regarding insurance as well as be potentially fraudulent.
Interestingly this erroneous description is also found on the Defaqto report on Gap Insurance, and may give a clue to where the subject has been researched by the trade body in question.
The views of the motor trade may well be completely different from those of consumers and insurance providers on the state of the Gap Insurance market.
The claim that Gap Insurance policies in motor dealers should be viewed as of sufficient quality simply due to the low rejection rate of claims is quite bizarre, and could demonstrate one of the main reasons why motor dealers are not the best place to secure a Gap Insurance policy.
For example, if a motor dealer was to provide a Return to Invoice policy to a consumer buying a brand new version, heavily discounted, of a run out model, then to replace this model in the future will clearly cost significantly more than the original invoice price paid. However, if a claim was made on the RTI policy it would not be rejected, but ultimately in that circumstance a VRI policy would have been much more appropriate.
Citing a low claim rejection rate is not a good indication of the product offered by the motor dealer, the outcome of the claim to a customer is. The suitability of products is something that the FCA should be more interested in, and indeed this has been highlighted by previous organisations in the past, such as the Financial Ombudsman Service.
The truth is that motor dealers do not normally have a range of Gap products they can provide, a ‘one size fits all’ approach has been common place, with a 3 year Return to Invoice product nearly always the single product offered.
Gap Insurance in the spotlight
A recent article from AM Online has highlighted how forward thinking motor dealers are changing their approach even before the report has finished. It says that the days of charging high premiums in motor dealers will become a thing of the past, and that motor dealers may have to provide a range of products to consumers, with reduced margins, with the aim to sell more products at a lower profit per sale.
Whilst it is impossible to know what the FCA report will provide, a number of changes have been speculated, including:
Commission disclosure – where the ‘retailer’ of the product (the car dealer or the insurance broker) has to tell you how much they are making from the policy.
Market disclosure – where a motor dealer offering you a product such as Gap Insurance, must tell you that you can buy the products elsewhere
Full range of products offered – More than one product is offered, a comparison is made and pro’s and con’s of each are explained.
In reality if these features are requested, there is every chance that the motor dealers may resist them vigorously. However, if the best outcome for the consumer is really the goal then they would improve the situation immeasurably.
If the motor dealers did offer the very best range of products, at the very best premium prices, then what would they have to lose by allowing consumers full access to the market?
In the considered view of GapInsuranceTV there are several obstacles preventing a fully functioning market, providing true competition, including:
Consumers having a poor understanding of Gap Insurance
Consumers only being told about Gap Insurance at the time of collection of the vehicle, thus giving no time for consideration and comparing the market
Consumers not being provided with a range of products
Consumer not being told of alternative sources of Gap Insurance in the market.
Of course these factors do not include the high prices charged at motor dealers, but if suitable changes were made then the inevitable effect would be that motor dealers would have to drop premium prices, and reduce margins.
The products and prices in motor dealers are not always down to the motor dealer themselves. Often exclusive deals have been struck between the manufacturers and insurers, or perhaps a finance company. These ‘exclusive’ deals mean that the dealer may only be able to provide products from one insurer. Can this really help the consumer get access to the very best product for their needs, or is the ‘one size fits all’ approach the only one that the dealers have available?
Perhaps the ending of such exclusive agreements may be too much to ask, but can the consumer really be at the heart of the process if this is allowed to continue?
2014 will indeed be an interesting year for Gap Insurance in the UK.