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FCA proposes changes to GAP insurance sales

The Financial Conduct Authority (FCA) is proposing a number of changes to the way GAP insurance is sold which it hopes will shake up the industry.

Following the FCA’s investigation into GAP insurance which began in July 2013, the organisation is looking to impose a requirement that asks customers who purchase GAP insurance as an add-on to confirm they want the product in the days following the sale of the primary product.

The FCA is also looking to ban pre-ticked boxes ‘to ensure consumers actively choose to buy an add-on and are clear when and how they are purchasing a product’.

The FCA also wants to firms to publish claims ratios ‘to highlight low value products, pressuring providers to deliver better value to their customers’.

The FCA has said it will also be looking to improve the way add-ons are offered through price comparison websites; including how and when they are introduced.

A spokeswoman for the FCA said the changes are just proposals at this stage and the organisation will be gathering feedback between now and April 8. A decision will be made about the FCA's proposals after that.

Dealers can send feedback through the FCA's online reponse form.

Christopher Woolard, director of policy, risk and research at the FCA, said: “There’s a clear case for us to intervene.

“Competition in this market is not working well and many consumers are simply not getting value for money. Firms must start putting consumers first and stop seeing them as pound signs.

“We believe our proposals will address these issues and prevent consumers paying for poor-value insurance products that they may not need or use.”

The FCA’s report into GAP insurance found 69% of add-on purchasers could not accurately remember how much they paid for the product three to four months later, and 19% could not even remember buying it.

The FCA report into GAP insurance said: “The sales process in car showrooms often leaves individuals believing that the only source of the product is the showroom where they are buying the car.”

The report showed that GAP add-on insurance claims ratios from 2008 to 2012 averaged just 10%.

The FCA analysed evidence about firms and consumers in the travel, gadget, GAP, home emergency, and personal accident add-on insurance markets.

The FCA reviewed the experiences of over 1,000 consumers and carried out behavioural research to understand if buying decisions are affected by different sales tactics. The FCA also reviewed product literature, sales, pricing, profitability, and claims.

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  • Jon - 11/03/2014 11:06

    Why don't the FCA say what they really mean......Having studied the motor industry the FCA has noticed a couple of areas where dealers are in danger of making a profit. We have started the process of closing these profit opportunities immediately so we can make life as hard as possible for these mass employers to ensure there is no growth in the industry. What they don't seem to understand is that dealers can't just think, oh well, lets all just make less money and an even lower return on our investment. The outcome of all this in the long run will mean car prices go up, is that the "best possible customer outcome" that the FCA talk about?

  • max - 11/03/2014 12:06

    There are clearly issues in the some corners of the Gap market, however this is not the answer to it, any more that the PPI solutions where. The FCA needs to undertsand these markets in far more detail, than this study and its remedies show. Dealers and other parties MUST respond to the consultation quickly. Dont just 'bleat' about dealer profit, explain what this means to the whole market, inc for customers. It maybe too late, but don't let Gap go without a fight.

    • Jon - 11/03/2014 12:56

      @max - When you say explain what this means to the whole market what exactly do you mean? Although I may just be a "bleating" car dealer I am struggling to see the positives. The really interesting part is if dealers opt out of such products how is a customer not being offered GAP the best possible customer outcome? I often wonder how long it will be before someone who loses their job or becomes ill thinks they have been mis-sold finance because the finance house didn't give them the opportunity to protect their payments (due to the deluge of PPI claim backs), therefore putting them in a position of risk without informing them. Bleat over, I shall now return to my field and chew nervously....Sunny weather, BBQ season, never good news for us sheep!

    • Hassled Harry - 11/03/2014 14:33

      @Jon - oh the irony, "the deluge of PPI claim backs", which is help funding new and used car purchases!

    • Jon - 11/03/2014 15:10

      @Hassled Harry - How right you are Harry, and how interesting it will be when the market drops in 3 years time as none of the PPI customers have the funds to pay for new vehicle deposits. Then of course more dealers may start to struggle as all the other sales profit avenues such as GAP and finance have been cut so the profit per unit is through the floor. But hey, what do I know. As long as anyone who has claimed back their PPI who then loses their job or has an accident and cant afford to pay for their new car has it repossessed with a smile on their face then that's fine, each to their own. The problem I have is everyone is quick to jump on a bandwagon of claim this claim that claim the other but then when something goes wrong they want others to step in to bail them out! Maybe I'm just a grumpy old man but give it 3 years and all this claim culture wil go the other way. Claims management companies will buy details of people who have had cars written off and imply to them that if the dealer didn't offer GAP you could be entitled to compensation because knowing now your car has been written off you would have taken it if offered. Anyway, I shall continue down my path of insanity and dream of a world where people are responsible for their own actions and decide themselves if they want to buy something and how much they are willing to pay!

  • GAP man - 11/03/2014 13:34

    About time! Dealers have been making excessive profits from GAP insurance for far too long. How can the motor industry justify selling a product which has a dealer net price of £70 to their customers for £300+? The FCA should have introduced commission disclosure. Perhaps this would have made dealers think about the customer before the profit margin. Funny thing is, selling the product for less would have probably meant more sales and similar income in the end!

    • Essex boy - 11/03/2014 13:37

      @GAP man - fair point but dealers are in the business of making money and where we can, lots of it. This is nothing like PPI but we're being smeared with the same brush. The FCA will kill off GAP but the industry will create something else to fill the void!!

    • Jon - 11/03/2014 13:45

      @GAP man - Just out of interest GAP man, how much do you think is a reasonable figure for a car dealer to make per retail car nett including any add-on products?

    • GAP man - 11/03/2014 13:52

      @Jon - good question. How much profit do you think an internet provider makes from sellling exactly the same product at a much lower price? A 400% mark-up sounds excessive to me and it appears the FCA thinks the same too

    • Jon - 11/03/2014 14:04

      @GAP man - Overall about £86 per policy however would say their overall profit is about the same if you take into account their lower overheads etc. the website costs very little to run, the customer fills in the proposal from themselves and the policy is registered directly by the supplier as opposed to the internet broker. So as a return in investment I would say very similar. There you go, I have answered your question so now could you answer mine?

    • GAP man - 11/03/2014 14:30

      @Jon - not sure about your maths Jon. Online providers can't be making £86 per policy considering that you'd be hard pressed to find an online GAP provider selling the product for more than £150 (ironically because the competition is too fierce) and the average price is closer to £120 and this includes IPT and the insurers premium. I'd suggest its much closer to £30 per policy but let's say its £50 for arguments sake. That's still £200 less than the average dealer profit on a GAP sale! I think I've answered your question but if you'd like a figure to play with, £100 profit per policy sale is probably reasonable given the additional overheads. Whatever the number is, consumers are financially penalised for purchasing the same product from a motor dealer and the FCA has recognised this and is prepared to do something about it

    • Jon - 11/03/2014 14:48

      @GAP man - Hi GAP man, I think you mis-read the question, I asked how much per retail sale you think a dealer should make including add-on products, just interested in your perception. For the record I also think £100 per policy is reasonable and that is what we make, well £98.63 to be precise but then we tend to work on the theory of charge less and sell more. So, if you would like to answer the question I would be interested in your response. Thanks

    • GAP man - 11/03/2014 15:06

      @Jon - apologies Jon, I'd say a 15% profit margin is acceptable but accept the figure will differ dependent on franchise, non-franchise, location etc. It would appear your company is behaving as the FCA wants the rest of your peers to behave. Less focus on profit and more on customer need. Unfortunately, it appears you're in the minority...

    • G4ABurton - 14/03/2014 18:17

      @GAP man - of course the disparity in Insurance Premium Tax plays a huge role as well. A £400 dealer policy contains 20% IPT (£66ish) whereas a £150 internet one only has 6% against it (£9). With the FCA pointing out that only 10% of the average premium is paid out in claims, can we assume they are talking about average dealer prices? If an average at a dealer is £400 then £40 may be paid out in claims, but they failed to point out that £66 goes to HMRC. This extra tax also distorts the claims ratios. Fancy that more tax is paid to the Government than is paid out in claims, who would have thought it?

    • G4ABurton - 14/03/2014 18:23

      @Jon - having worked quite closely with one of the leading internet brands for Gap recently I can say that the £30-£40 margin is quite close to the mark. They are also a bit more expensive to run than you may think also, I am sure a figure of around £15k a month on Google marketing was about right. Not as expensive as running a sales department of course, but add in staff wages etc, then still not cheap. As has been mentioned it is highly competitive between a dozen or so brands. Of course the huge advantage they have is that anyone checking out Gap Insurance at all could go to them. Dealers only sell to their own customers. I suspect when the FCA have finished, those owners of online Gap brands may well be in a great position unless dealers can drastically drop their prices.

  • Steve Boucher - 11/03/2014 13:37

    I would like to highlight three issues raised by the FCA about GAP insurance; 1) The FCA’s report into GAP insurance found 69% of add-on purchasers could not accurately remember how much they paid for the product three to four months later, and 19% could not even remember buying it. How many customers were asked if they could remeber exactly how much they paid for their car 3-4 months after taking delivery? 2) The FCA report into GAP insurance said: “The sales process in car showrooms often leaves individuals believing that the only source of the product is the showroom where they are buying the car.” Does the FCA want dealers to offer GAP products from every supplier and know exactly how each product differs? The FCA assumes that every customer who comes into a showroom has done no research whatsoever on new car prices, finance interest rates, part exchange prices, insurance, etc? 3) The report showed that GAP add-on insurance claims ratios from 2008 to 2012 averaged just 10% According to the RAC, around 500,000 cars are written off each year - surely there many of those 500,000 motorists who would have benefitted from GAP insurance?

    • Hassled Harry - 11/03/2014 13:48

      @Steve Boucher - you're missing the point Steve. The claims ratios reflect the difference between the claims paid by the insurer compared to the average selling price achieved by the dealer. In simple terms, the average GAP sale attracts a vast mark-up (which is all dealer profit) compared to the amount paid out by insurers. Dealers have long exploited their position of strength and the vunerability of customers to sell GAP insurance at overinflated prices. Those days will soon be over and the winner will be all those customers who purchase GAP insurance elsewhere for much lower prices i.e. stripping out all the dealer profit margin! The FCA has got this one right IMO

  • Steve Boucher - 11/03/2014 14:33

    Harry, apologies for mis-understanding the stats - perhaps it may be pertinent to find out why the claims ratio is so low, not just produce a statistic? How many cars that have GAP insurance have been involved in an accident? If new cars are less likely to be written off becuase of the ratio of repair cost to replacement cost, then perhaps the market for GAP insurance should really be the lower value end of the used car market?

    • Hssled Harry - 11/03/2014 15:12

      @Steve Boucher - Steve, the claims ratio is low because the claims frequency for write-offs is at an all-time low. Most motor insurers operate body repair centres so its more cost effective to repair than write-off and manufacturers are also keen to maintain road presence and continue to look at ways to stop their models from becoming write-offs. Tag all of this to reduced average miles/speeds due to the fuel prices, which lower the risks of an accident, and hey presto, you have an answer.

    • Steve Boucher - 11/03/2014 16:00

      @Hssled Harry - I understand that the manufacturers want to sell parts and body panels, but most insurance policies state (in the small print, after you've paid your premiuim, how does that sit with Treating Customers Fairly), “We may decide to repair it with recycled parts or with parts which have not been made by the car’s manufacturer but are of a similar standard.” So the insurers use second hand parts or cheaper parts from a non-OEM supplier, to minimise the repair cost. By reducing the repair costs, the insurer doesn't have to write the car off, reducing their liability under the policy. As a consumer, would you be happy, that after a major accident, you knew your car was back on the road only because of a cheap repair? And aren't 'insurance approved' bodyshops just the cheapest bodyshop for the insurer?

  • max - 11/03/2014 15:06

    The FCA, would like very well educated customers, the reality is they aren't, even going to a comparsion website, or using a defacto 5* rating (when you know how those ratings are scoped) is not always in the customers best/own interest. The FCA does nothing, like the FSA before to educate customers bar some lame generic efforts. IF a customer red this report, cover to cover, would they really purchase a better cover for themselves? Customers who do detail will always seek out the best cover for them. NB not the cheapest. Those who 'shop' by price alone may in particular circumstances come unstuck. Not all 'gap' has the same benefits or exculsions, and some of the internet offerings are clearly priced to sell rather than offer the best of cover. Not that some dealer offerings are any better. Seek the product benefits ( & exculsions) you need, from a reliable source, at a price 'you' think is appropriate, and take your chance, as an informed customer! Dealers have the opportunity to offer that relationship of trust! 99% is POS sold, 1% as stand alone (page22), but the FCA will never accept that some products are 'sold' as opposed to 'purchased'. FCA report maybe flawed, but remedies are coming. Respond to the consultation, and not with some of the quotes below.

    • G4ABurton - 14/03/2014 18:12

      @max - Most of the online products are much more focused on customers than the dealer ones, just like the FCA want (and as it should be?) How many dealer ones allow for a deferred start date when the customer has replacement cover for the first 12 months on a new car? If the customer buys a 3 year RTI then they only get the benefit of two. How many will allow a free transfer of the current policy if the customer changes the policy during the policy term? If you have a 5 year finance agreement, why does a motor dealer only offer a 3 year RTI when you can get a 5 year RTI on the internet? The customer is making a clear commitment to 5 years ownership (OK it may well be shorter), so they would be better going for a Gap Insurance product to match. Why do motor dealers offer RTI when they have discounted the car, possibly 'written back' the invoice, and therefore reduced the customers invoice price to protect. Online providers offer Vehicle Replacement for the future replacement cost, even if (as is likely) the replacement cost is far higher than the original invoice price paid. The dealer sells Gap Insurance as a secondary product, the online guys specialise in it, and the products they sell are designed for the customer and not the dealer. I agree the Defaqto ratings are not very good, but actually flatter many dealer products in comparison to the online brands. Too many motor dealer groups are tied in to exclusive deals with suppliers for Gap. It is simply ridiculous to see the same underwriting insurer with online brands, giving better features and we have not even begun to compare the price yet!! If the motor dealers are so confident that their products match up on features with the online brands, then surely they would not be too concerned with this weeks events (of course I have my tongue very much in my cheek). I agree that it is not about price, compare feature for feature and the dealer products currently fall way short of their internet cousins. This could be a huge opportunity for the motor dealers to get their suppliers to improve the features to compete.

    • G4ABurton - 14/03/2014 18:36

      @max - And just to expand on your 'reliable source' and 'relationship of trust' comments. Of course dealers will bandy these about but the underwriters of the dealer products are often the same as the online brands, sames claims process etc. And why would the dealer provide a 'relationship of trust' for a Gap Insurance product. Even if it has the manufacturers name on the policy then it is still nothing to do with them. The insurer deals with the claim, not the manufacturer. The manufacturer will just get their slice of the cake by allowing the product to have their name on. I think this will be an ideal opportunity for the motor dealers to reassess the products they offer, and make sure they can compete in an open market.

  • Steve Boucher - 11/03/2014 16:20

    Harry, I understand that the manufacturers want to sell parts and body panels, (as they are very profitable for the manufacturer) but most insurance policies state (in the small print, after you've paid your premiuim, how does that fit with Treating Customers Fairly), “We may decide to repair it with recycled parts or with parts which have not been made by the car’s manufacturer but are of a similar standard.” So the insurers use second hand parts plus parts which are not from the car's manufacturer. Perhaps this is why the write-off ratio is so low, as the insurers are trying to minimise the value of claims. If insurers had to restore cars to their original condition following an accident, perhaps the ratio may be different. As a consumer, following a major car accident, would you be happy driving your family around in a car which had only been put back on the road because the insurers found a cheap way to repair it?

  • Chris Watson-Jones - 17/03/2014 11:19

    Regarding the claims ratio being just 10%, if that is accurate then I beleive that is a actually a high claim rate for a product that does not cost much to buy, to protect the whole car value in any write off situation. This is assuming the product has been sold at a sensible price in the first place. Compare the amazing value for money here when you compare it to a Tracker, which will cost twice as much and not help at all in the case of a write-off.