It has been a turbulent period for guaranteed asset protection (GAP) insurance, with recent Financial Conduct Authority (FCA) intervention forcing significant change on the market and causing shifts in consumer and dealer behaviour. Chris Lemmon spoke to industry figures to learn the current trends and challenges.
GAP insurance providers have benefited from the success of the new car finance market over the past decade, which has seen the value of POS new car finance increase from £7.8bn in 2010 to £19.1bn in 2017.
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The number of new cars purchased using POS finance almost doubled from 517,000 in 2010 to 990,000 in 2017. With the greater availability of finance opportunities, the number of cars sold increased, and GAP insurance sales followed suit; however, recent economic uncertainty has triggered a wave of hesitancy across the UK motor industry, with sales of new cars faltering while consumers await the outcome of the Brexit situation.
Financial results show that motor dealers are having a tough time of late, while further FCA intervention could force dealers to completely rethink their strategies around finance and add-on products such as GAP insurance.
The FCA decided to introduce new measures to sales of GAP insurance products following an investigation into motor dealers providing the add-on insurance in 2015.
The regulator felt that the GAP insurance was being mis-sold to customers who lacked a complete understanding of the product and their options. In addition, the FCA felt that motor dealers enjoyed a strong POS advantage over independent providers – which meant there was little or no pressure on them to reduce the price of the product.
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By GlobalDataTo tackle this, the FCA installed a requirement for vehicle sellers to provide more information to customers and implemented a ‘two-day pause’ rule, meaning sellers can start the sales process but cannot conclude it for a minimum of two days. This was designed to afford consumers some time to shop around for alternative providers, and decide whether they need the product in the first place.
Dealerweb chief executive Martin Hill welcomed the new measures, stating: “Compliance is key to the sales process. The current FCA investigation into motor finance shows that from GDPR to treating customers fairly, compliance should be an integral part of closing any sale.
“When structured correctly, compliance procedures should create a more transparent sales process, which ultimately will help to increase sales.”
Post-Intervention
Last year, the regulator released an update on the market since the new measures were put in place. “After our intervention, consumers now engage more with the decision-making process, with shopping around more than doubling,” a statement read. “Add-on GAP insurance sales are 16-23% lower than they would have been had we not intervened. Some consumers decide, on reflection, not to proceed with the purchase.”
Separate figures from Dealerweb revealed that total GAP insurance sales rose by 15.4% year-on-year in October 2018 – highlighting the positive impact of the FCA’s intervention in the independent GAP insurance market.
However, independent GAP providers do have an advantage over motor dealers in the market. James Cartwright, managing director at independent GAP insurance provider Direct Gap, explains that the rate of insurance premium tax is different for independent providers than for motor dealers.
“The car dealer will pay insurance premium tax at a rate of 20%, mirroring VAT,” he says. “Whereas for us, as an independent, the rate of insurance is actually lower at 12%. So there is an immediate cost saving for the customer of 8% on the insurance premium tax.
“Another advantage is that the motor dealer offering can generally only be sold within a window of 14 days of when the customer takes delivery of the vehicle. Our products are far more flexible, with up to 180 days to offer a product to the client.”
Consequently, independent providers can offer customers more flexible insurance options at a far lower price than the motor dealer can. With the FCA two-day pause rule now in place to give consumers the option to shop around and assess their options, dealers face tough competition on the GAP insurance front.
A Challenging Year
Since the positive performance in 2018 however, the picture has not been so rosy for the industry. The most recent figures from Dealerweb reveal that there has been an 8.9% decline in GAP insurance sales in the first half of 2019 compared with the same period last year.
Hill says: “The results reflect the headwinds the new sector has faced, and this is likely to continue for the rest of the year. Used car demand remains robust, and GAP sales in this sector have increased by 2.7% in a very cost-conscious market.”
There have been a number of challenges facing the industry as a whole in the last 12 months, which also look set to continue to disrupt the GAP insurance market for the foreseeable future.
For starters, the wider motor industry is in the midst of economic turmoil, with the most recent figures from Cox Automotive revealing a fifth consecutive month of falling new car sales – and the worst July for new car sales since 2012. The impact of falling consumer confidence and fewer new car sales is also placing a strain on GAP insurance sales, compounding the difficulties faced by motor dealers.
As a result of the ongoing market decline, Cartwright believes there has been an increased drive from motor dealers to secure sales of add-on products for the cars they have sold.
“We’re seeing cancellations from customers whose dealers have come back to them and slashed the price of the product, or they may include it in the finance package in some way. In some cases, the dealer has refused the sale of the car unless the GAP insurance policy was also purchased,” he explains.
Additionally, Cartwright believes that one of the main issues impacting the market is the lack of underwriters in the market willing to offer GAP policies. The last 12 months has seen a number of underwriters withdraw from the market, pushing the policy rates higher.
Elsewhere, the FCA’s recent investigation into the motor finance market highlighted concerns over commission structures – with add-on product commission structures expected to be reviewed and potentially reduced or removed in the future.
“That is a big threat,” notes Cartwright. “It is getting increasingly difficult for car dealers to make a profit from finance and add-on products.”
Changing Behaviour
“GAP insurance remains a popular option for consumers,” said Louise Wallis, head of business management at the National Franchised Dealers Association (NFDA).
“The need for dealers to provide prescribed information has helped to raise the profile of the product among consumers. Thanks to the popularity of PCP and PCH options, consumers have become more aware of the value of the vehicles they buy. As a result, more consumers tend to be interested in GAP insurance.”
The accelerating switch to alternatively fuelled vehicles (AFVs) has also had an impact on the GAP insurance market, with consumers generally more concerned about the residual value of their AFVs than with their previous internal-combustion-engine vehicles.
“The industry is more worried about the residual values with electric vehicles because the technology is unproven at the minute,” says Cartwright. “Five years ago, when hybrid vehicles started to be sold, there were similar concerns about the residual values.”
Recent research from GAP insurance provider InsureTheGap highlighted the differences in the price depreciation of electric cars currently on the market. It found that the price of a Renault Zoe depreciated by 61% over a three-year period from its purchase price of £19,988 to only £7,830 in 2019, while the BMW 330e dropped from £33,800 new in 2016 to £15,900 in today’s prices.
While residual values remain unpredictable for electric and hybrid vehicles, demand for GAP insurance is likely to increase as consumers seek to protect their investment. Ben Wooltorton, chief operating officer at InsureTheGap, says: “As with all investments, it pays to know how well they will keep their value over time, and electric cars are no different.”
Wallis explains that GAP insurance will remain a viable option for consumers, as it protects potential losses should their vehicle be written off. “It means a consumer is able to buy a replacement vehicle without having to fund any difference between the insurance claim and the price of a new vehicle.”
Keyless Theft Effect
One of the FCA’s key findings in its investigation of GAP insurance was that, on average, only £10 in every £100 paid in add-on GAP premiums was being paid out in claims. This average claims ratio of 10%, according to the regulator, is much lower than other general insurance products on the market – meaning it is unlikely that customers would ever need to take out GAP insurance in the first place.
However, Cartwright says the trend is changing. “If you look at 10 years ago, 80% of our claims would have been accident – whether fault or non-fault – while 20% would be theft. If you look at the current statistics, in excess of 50% of our claims are now theft claims, with the rise of keyless entry. The claims frequencies are definitely increasing.”
With the rise of keyless car theft, Cartwright believes the industry is likely to see a shift in the behaviour of both consumers and dealers. There may be improved demand from consumers in the GAP market due to increased fear of having their car stolen, while dealers will be facing substantial rate increases on GAP insurance due to the level of claims being lodged.
What Next?
Hill says motor dealers are pedalling hard in 2019 across all elements of their business. “We have seen an increase in the number of outbound prospecting calls of over 10% in new car sales. Equally, finance penetration has increased by 1.4% for new and 1.2% for used. GAP sales continue to provide a valuable income stream and they should be structured into the sales process.”
Moving forward, it is clear that dealers face an uphill battle with current and incoming regulation on sales of add-on products such as GAP insurance. Wallis believes that dealers will have to consider reviewing the viability of offering GAP if there are any significant impacts on the commissions they earn.
“Commissions are not solely aimed at making a margin, but they also cover the cost of delivering a product to the consumer,” she notes. “Dealers are facing increased compliance as well as delivery costs of financial products. These are elements they need to consider when reviewing any product sold.”
Motor dealers will be keeping a close watch on FCA announcements in the coming months, as potential caps on add-on product commission could have serious implications for profit margins. Should such measures be introduced, dealers may be forced to rethink their strategies around the sale of motor finance and add-on products.
