Mike Cobb speaks to Peter McKenna of AMS and Joe Pattinson of BMW Financial Services about insurance considerations for the finance market
A car dealership is not just an opportunity for manufacturers to sell their metal, or a chance for the dealer to gain some needed
income from a finance deal. It can also offer the consumer insurance on what will almost certainly be the second most valuable
purchase they will make.
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The market for insurance is crowded with products. Over and above the traditional car insurance dealers can offer tyre insurance, cosmetic insurance and alloy wheel insurance.
And it doesn’t end there. Manufacturers themselves can add even more to the dealer’s range, including general car insurance which is usually sold externally to the dealers.
They can even add more esoteric products, as Joe Pattinson, marketing manager of BMW Financial Services explains: “We have home insurance and travel insurance, but again not sold through the dealer network, and we also have an insured warranty product which is very popular, again not sold through the dealer network.” The range of products is extensive but one in particular has proved popular with customers – gap insurance.
Overall, insurance does well for dealers and manufacturers. According to its thirdquarter statement, the insurance products sold by the BMW Group in just nine months numbered nearly 770,000, up 6.8% on the same period last year.
In addition it’s often a side of the finance business where the risk is borne by a third party insurance specialist, such as Allianz
in BMW’s case. Pattinson sees this as benefitting both parties. “Most manufacturers will have an insurance partner who will provide the insurance expertise, the underwriting, and manage the risk effectively, whereas the manufacturer effectively provides access to
the customers through the channels they have available,” he said.
In brand we trust
As far as customers are concerned they are buying into another part of a brand they trust. “Everything is branded and managed by
BMW and, in the end, that obviously gives the customer some reassurance that everything has been thoroughly checked out and is part of BMW, so if they have any issues they can come to BMW and we can sort that out for them,” says Pattinson of their offering. This branding also means that for a marque or dealer, what their third party provides is about more than just pricing.
“Generally it comes down to a few things. It comes down to price, service and range of product, but also how long the company has
been in business,” says Peter McKenna, managing director of insurance provider, AMS Group.Get the first two wrong and the nature of the business means the dealer can change providers in a matter of days according to McKenna.
Some dealers, McKenna explains, will change their suppliers every two to three years depending on their contract terms. Generally this is only an issue for providers when dealing with the smaller dealers. Larger networks tend to roll contracts from one term to the next. McKenna’s company has, for example, dealt with one of the larger UK networks for more than eight years.
And changing is easy and quick for dealers, when their contract is up. “We can actually set them up on our online system and get
all the checks done and everything else, usually within 24 hours,” says McKenna about signing up new clients to his offering.
Long-term benefit
Insurance also provides a long-term benefit to dealers beyond the initial income stream. Pattinson cites cosmetic insurance as an
example, especially when sold later on by the manufacturer: “It means the dealer gets the benefit of that, as they get the cosmetic
repair work back into the network etc,” he explains.
General car insurance is not sold in BMW’s dealership other than as a seven-day temporary cover. The manufacturer therefore takes the responsibility for approaching the customer after that period or when the renewal date approaches.
Both manufacturer-led approaches, Pattinson says, renews the thought of the brand in the buyer’s mind, sometimes long after initial purchase. Insurance then can do more for enhancing brand loyalty than any other financial product in their arsenal.
That arsenal should not be too large however. Both Pattinson and McKenna agree there should never be too large a portfolio of products for the dealership to try selling, as going down this route only leads to problems. “Some dealerships make the mistake of
offering six or seven different products,” explains McKenna. “And they offer it in a package, and say ‘Right, this is what we
think is the best deal for you and here’s your monthly payment, and the customer says: What!'” At this point McKenna says end users look to strip out the products they feel unnecessary.
For this reason dealers should only be given enough products they have time to sell and which fit-in with their business.
Mind the gap
One of these is gap insurance, already one of the most popular insurance products in a dealership’s arsenal and beginning to gain
importance to a dealer’s bottom line.
Gap has reached penetration rates in the US of over 70% on all new car purchases. The UK and European markets are still small by comparison, but already the market in Europe looks as though it will soon match the US.
McKenna says: “In this country you’re talking about approximately 25%, but it’s growing rapidly. We estimate it will reach the US levels maybe in the next three to five years as more people become more aware of it.”
The product has proved popular with dealers as well as car buyers “because they can make a lot of money out of it”, says McKenna.
Pattinson believes there’s more to it, not least because the product is not one customers eventually regret buying. “It’s good from
my point of view because it means that it’s being used and it’s not one of those products the customer is never going to need,” he
says. “So I think that’s generally why it’s becoming more and more popular.”
McKenna confirms that sentiment. “Gap is the biggest seller they will have next to finance, and if it’s done right and carries on being done properly with the right product it will continue to do so. It’s good for the customer and it’s good for the dealer,” he says.
An inspector calls
But popularity, especially when it’s with the vendor, brings other problems, namely, in a post-PPI world, regulatory scrutiny.
As Motor Finance goes to press the Financial Conduct Authority is conducting an investigation into the ‘add-ons’ that are sold
alongside cars and mobile phones.
The fear among dealers is that this will become another incident like payment protection insurance according to both McKenna and Pattinson.
McKenna believes it may be too early to say for sure if the fallout will be as severe.
But McKenna believes, while the possibility of fines remains, the results of the investigation are likely to be less dramatic. One possible conclusion he sees is a cap on premiums, as is the case in some US states. Pattinson says: “I actually think we will
see more regulation come in, and we will see the price become more fixed, and more manufacturers and more dealer groups are capping the sell out price and these sorts of things.”
Aside from the benefits to the consumer, in Pattinson’s view, regulation will also benefit the finance industry. “The more that regulation
happens the better for me,” he says. “I welcome it. If you’re very transparent about what you’re doing with the customers then in theory there’s no reason why you can’t sell more products, because customers are going to feel much happier that they are able to see exactly what’s going on, and what the benefits of that product are, and how much is being charged, and what commissions are
being paid, and all of those things.”
Even if regulation brings benefits to dealer and consumer alike, it’s perhaps inevitable too that bureaucracy will increase for dealers.
Already the sales of insurance products are subject to a number of regulatory measures, which may eventually be the stumbling
block for dealers who suffer from the most complaints about mis-selling.
McKenna believes that any fines the FCA imposes are more likely to come from a failure in the systems than any real evidence of
selling inappropriate gap products to clients.
Train to gain
Part of the measures manufacturers and third-party insurers are taking to avoid these pitfalls are to enhance the skills of dealers
through training. And training brings more than just efficiencies to paperwork and compliance; it also helps dealers and customers
understand the gap product better and therefore increase penetration rates.
Average take-up of gap insurance on all car sales is around 25% according to McKenna and, with training in place, dealership networks, such as BMW’s, can hit rates of 40%.
On sales involving finance, dealership training brings even more benefits. “We provide training and so on, so when somebody comes in and wants gap explaining to them, the dealers are getting better and better at doing that. Some of our major dealer groups are already getting 70 to 75% penetration,” McKenna says.
BMW’s penetration is a fine example “Because it’s a natural fit and it works quite well we have upwards of 70 to 80% finance penetration” says Pattinson, who also points out that gap insurance is one product customers immediately see the sense of when it’s
explained to them by someone with good training. “If they were to be unfortunately involved in an accident they don’t necessarily want to be left with the problem of owing money on finance that’s more than the insurance payout,” he says. “So I think that’s why it’s
becoming a much more popular product and it’s one of those insurance products that’s a genuinely good product to have. And it pays
out at quite a high rate.”
Future competition
As customers become more aware of the product’s benefits external suppliers have begun to appear more regularly offering their services, particularly online and especially to affluent customers. “The average online price of a car is over £25,000,” explains McKenna. “The average in a dealership is £14,000. The profile of the person online – it shouldn’t surprise you – is usually professional. They’ve heard about gap.”
McKenna urges caution with such suppliers however. “Anybody can buy gap by going online,” he says. “But those policies are all written by underwriters offshore in the main, and if you look at the small print you’d have a heart attack!”
The advent of online providers will still push down the price of insurance, and gap in particular, despite the potential pitfalls for the consumer, say both McKenna and Pattinson.
Online will also bring other innovations to the insurance market Pattinson believes, particularly through the increasing use of telematics in vehicles. “I think the way forward for us on insurance will be around telematics and the utilisation of technology – that’s really where we want to go,” he says.
BMW is launching an insurance product to go along with its i3 electric vehicle similar to a limited mileage policy. The difference, however, is this one uses the telematics to allow BMW to switch that policy to one where the customer can pay per mile or switch to a more conventional policy.
Pattinson thinks this is one of the first insurances of this type in the world, and one that marks the future of insurance.
Flexible personalisation “What it will be about is flexibility and personalisation,” says Pattinson, whose vision of the future is one where the information stored in the car combines with the needs of the customer to provide flexibility in all forms of insurance.
Pattinson believes this is an exciting prospect and one he expects manufacturers and dealers will be at an advantage to exploit. “It
wouldn’t be beyond the realms of possibility that you can use your connected drive in the car not only to purchase your insurance, but
also to view your insurance products and all those kind of things,” he says.
So if Pattinson’s future becomes reality, insurance won’t be just something the dealer sells to the consumer, it’s something the car
will do too.
mike.cobb@timetric.co.uk
