FCA General Insurance Add-on Market Study: Call for Evidence
The National Franchised Dealers Association (NFDA) welcomes the opportunity to give
evidence to the Financial Conduct Authority General Insurance Add-on Market Study.
The NFDA represents the interests of franchised vehicle dealers in the UK. We represent
around 80 per cent of the UK’s 4,900 car sales outlets. Car dealers sell around 2.1 million
new cars per annum and 3.7 million used vehicles and NFDA members represent over 40
different franchises. Dealers offer a number of services to consumers and businesses
including not only the sale of a vehicle but also:- servicing, repair and maintenance of a
vehicle, the supply of replacement parts, vehicle finance and insurance products such as
warranty, GAP insurance, paint protection products and tyre and MOT insurance.
The NFDA’s main interest in the add-on study is in relation to the sale of GAP products. The
success of motor dealerships and franchises depends on good reputation and therefore it is
in the dealers’ interest to provide the consumer with good quality products and services at a
competitive price – this applies to the sale of GAP products. The GAP insurance market is
strictly regulated and provides ample safeguards for consumers who wish to protect
themselves and their vehicle and as such is mutually beneficial to both parties.
What is GAP Insurance?
GAP insurance provides cover for consumers whose motor insurer writes off their vehicle
after an accident or incident. The GAP insurance covers the risk that a motor insurer may
not pay an accident claim sufficient to cover any outstanding finance or buy an equivalent
replacement vehicle. Most motor insurers pay only the ‘market value’ for a written off
vehicle, which does not equate to the retail value required to find a replacement car but
would be based on a valuation guide1 average or even trade value at the time of the
accident. Further, many insurers will only offer a ‘new for old’ replacement for vehicles
under 12 months old,2 meaning the majority of consumers purchasing a vehicle are at risk as
they have no protection against its depreciating value.
Duration of GAP Cover
Gap cover available on the market today generally has a duration of a minimum of two
years and a maximum of five years from the date of the vehicle’s purchase (as new or used).
Unlike many of the add-on products in the Market Study it is not an annually renewable
cover but a fixed term cover on a specific vehicle. Every vehicle suffers depreciation and, as
1
There are a number of vehicle valuation guides available for use by insurers, for example CAP Black Book or
Glass’s Car Guide, which will give an estimation of a vehicle’s monetary value. Valuations are made using
observations and data collected from all sectors of the industry.
2
‘New for old’ replacement periods are typically provided for either 12 or 24 months, however a 12 month
period is by far the most common. Source: Defaqto Review of the Motor Insurance Market (May 2012).
1
the vehicle ages, the difference between its original purchase price and the likely motor
insurance payout (if it is written off) widens. For example:
In January 2011 the vehicle is purchased for £10,000. The customer purchases GAP “Return
to Invoice” insurance cover (see below). In January 2012, price depreciation takes the
vehicle’s value down to £8,000. In November 2012, after an accident, the vehicle is a “writeoff” and the customer’s motor insurance makes a £6,000 payment. The GAP cover pays out
£4,000 when the customer claims on it. In effect, while the motor insurer’s exposure
reduces as the car ages, the GAP insurers’ exposure increases.
Types of GAP Insurance
There are a number of forms of GAP insurance but the main two are Return to Invoice (RTI)
and Vehicle Replacement Insurance (VRI):Return to Invoice GAP (RTI) – This covers the difference between a motor insurance claim
payout and the original invoice price or an outstanding finance settlement amount with a
finance house, whichever is the greater. This can be applied to both new and used vehicles.
Vehicle Replacement Insurance (VRI) – This is available for new vehicles only. It covers the
cost of a new replacement vehicle when the price is higher than the insurance payout.
Increasing Demand for GAP
GAP insurance is becoming an increasingly attractive option for policyholders. The reasons
for this are:





Consumers being more aware of GAP products.
Many consumers perceive GAP as a good way of protecting their risk.
More insurers restricting payouts under motor insurance claims for cars written off.
There is evidence insurers are asking a policyholder when a claim is being made
under a general motor policy if a policyholder has a GAP policy in place in order to
potentially reduce their own exposure.
Fewer insurers replacing vehicles under ‘new for old’ or only as an optional paid
extra on the policy.
Insurers are writing more vehicles off due to pressures on their own businesses such
as credit hire costs etc.3
Value of Benefits for a Consumer of Buying GAP
On average, where a GAP product is offered by a dealership, a third of customers purchase a
GAP policy with their car. Of these customers taking the policy, between 1 and 3.5 per cent
of the policies are cancelled during the life of the policy.4 Car dealers generally offer policies
3
Insurers write off over 500,000 vehicles a year. Source: HPI Ltd September 2013.
Source: experience of NFDA members in the year 2012 – the cancellation percentage varied between dealer
groups but all were below 3.5%.
4
2
that are free to cancel within the first 30 days of cover and then cancellable on a pro-rata
basis for the remainder of the term with a small (£35-£50) administration fee, in line with
ABI voluntary guidelines.
NFDA research has shown that claim rates are generally below 1 per cent and decline rates
are very small, averaging at 3 per cent of claims.5
Dealer GAP is suited to all but a small percentage of car buyers. Generally it is only those
customers with older cars or where they have chosen to take out “third party only” motor
insurance on their vehicle who are not suited to the product.
GAP Market Competition
Dealers are not the only source of GAP insurance for consumers. There are a number of
third party GAP providers, e.g. Click4gap, Easygap, Car2cover and ala.co.uk, many of which
are available online. A recent Defaqto report lists 92 different product/providers suggesting
that there is a large amount of choice of products for consumers allowing for strong
competition in the market place.6
The price and cover of third party GAP varies widely. The Defaqto report states that 81 per
cent of policies have a maximum benefit limit of £10,000. This is much lower than many
dealer products that can have a maximum benefit of £50,000.
GAP Insurers and Administrators
Dealers would normally offer GAP products that are provided by an insurance administrator
selected from the wide choice of suppliers in this sector. The policies will typically be
underwritten by a major insurer selected from a panel by the administrators to provide the
cover required.
Dealers, particularly the larger groups, look to re-tender their GAP suppliers on a regular
basis. As part of this process they ensure the product has the correct levels of cover for
consumers and that it includes features customers would want and expect. An example of
the content of such a review would be to look at the policy’s exclusions. They would also
ensure the insurer has a good reputation and claims history, as evidenced by data the
insurer is required to supply as part of the review. There is significant competition between
the providers/administrators of GAP policies. This allows dealers to negotiate the price that
they pay to the provider/administrator for a GAP policy.
The providers/administrators do not set a resale price for the GAP policies, instead leaving it
to individual dealers to set the retail price to consumers. Pricing will be heavily influenced by
the very competitive nature of the retail motor sector and the influence of third party GAP
5
Source: experience of NFDA members in the year 2012 – the decline percentage ranged between 0.58% and
6%.
6
See Annex A: Defaqto Press Release 23 April 2013 – independent assessment of Motor GAP insurance
policies.
3
providers. There is also some scope for consumers to negotiate the price they pay for GAP
during the sales process.
Consumer Buying Process
Consumers spend several months carrying out research before entering a showroom to buy
a car. Research suggests that consumers will visit 40 websites but only make 1.3 showroom
visits to make the final purchase.7 The website research involves not only visiting several
dealer sites, but also vehicle manufacturer sites and finance providers as well as insurance
sites. Consumers may also visit sites such as Autocar, Whatcar, Which? and other sites
offering help and information. Consumers, when researching the vehicle to buy, will not
only look for the car they want to buy but the additional products they will want to
purchase with the vehicle, such as finance, warranties, tyre and paint protection as well as
GAP products. The availability of such products is referenced on the car manufacturer and
car dealer websites.
The average consumer, when entering the showroom, knows the vehicle they want to buy,
how they want to pay for it and which additional products they will consider. It is also
worth reiterating that consumers normally do not make impulse purchases of vehicles. A
car is an expensive purchase that will be kept for three or more years and will need to suit
the needs of the consumer not only in respect to size, functionality and fuel economy, but in
affordability of ownership. At time of purchase they can choose to buy, from the dealer or a
third party, a cancellable GAP product covering the vehicle’s depreciation risk over the
whole period they expect to own the car, up to five years.
Dealer Sales Process
Dealers inform customers before they commit to purchasing a car that finance and
insurance products are available. This gives consumers the time to shop around for
alternative finance and insurance products if they wish. Once the sale has been agreed,
including finance, the dealer offers additional products including GAP which may be taken
with the vehicle. As part of this a Demands and Needs Statement is completed to establish
the customers suitability and eligibility for a product. Also, all products offered are
accompanied by adequate explanation so that a consumer can make an informed choice.
All products are dealt with separately to ensure they are not “bundled”. This ensures not
only the customer is treated fairly but also ensures the dealer carries out their obligation
under FCA conduct rules.
If the customer decides to take GAP they are given a cooling off period, normally up to 30
days, during which they can cancel that purchase for little or no cost, and told that the
product is cancellable at any time after that on a pro-rata cost basis. Any fees for the
cancellation will be explained but this is normally free during the cooling off period and
somewhere between £35 and £50 after this.
7
International Car Distribution Project published in 2012 – decline from 4 in 2008 to 1.3 in 2012.
4
Dealers typically sell GAP to between 30-35 per cent of new car customers. It is also worth
noting the sales process for a vehicle with a customer typically takes between three and
seven days depending on whether finance is involved. However, it is not unusual for the
process to takes one to six months if a vehicle is on factory order and there is a substantial
wait for delivery. In either case, this allows consumers ample time to shop around for GAP
and other products that are available through third parties.
Sales Executives Remuneration
Sales executives are generally remunerated for the sale of GAP insurance products as part of
a balanced pay plan which rewards them for the overall profitability of a car sale. Typically
the GAP insurance would only represent a minority percentage of the income they would
derive from a car sale. FCA authorised dealers are required to ensure that pay plans for sales
staff do not influence the sale of insured products by giving undue incentive or rewards. This
allows them to make recommendations based on consumer’s requirements and needs, not
on the profitability of individual products.
Dealer Profit Return & Margin
There are many variables that dictate how much a dealer will earn when selling a vehicle. At
a high level dealership profit return is typically between 0.5-3 per cent depending on
franchise, sales volume, model mix and investment levels such as dealer corporate identity.
A full service dealership not only makes a return from its sales operation but aftersales
departments too.
Vehicle sales account for approximately 80 per cent of the average dealer’s turnover but
accounts for just 45 per cent of profit. Service, parts, bodyshop and rental operators will
make up the rest.
Vehicle profit is more complex to analyse as the overall margin is dependent on a number of
factors including make, model and derivative of a vehicle. Also whether the vehicle is
financed, what support a manufacturer provides on the sale of the vehicle and any
accessories bought with the vehicle, as well as whether the consumer takes products such
as GAP, paint protection and a service plan. It is safe to say, though, that if the ability to
offer GAP was removed from a dealer this would have a negative impact on the margin
which would need to be made up from somewhere else and most likely result in more
expensive cars for consumers.
The Profit Margin in GAP insurance policies varies depending on the cost of the vehicle, the
amount of benefit payable under the policies terms and the term of the policy e.g. A Used
Fiat 500 may have a retail price of £7000, a maximum policy benefit of £5000 and be 2 years
in duration. Alternatively an Aston Martin Virage would cost £150,000, a GAP policy benefit
of £50,000 and a 3 year term. The policy cost and margin will be dependent on the insurer’s
risk which obviously accelerates the higher the value of the vehicle, the greater the benefit
payable under the policy and the longer the vehicle is on risk.
5
Conclusion
Motor dealers provide GAP insurance to their customers in a highly regulated environment.
Sales practices and procedures adhere to the FCA ’Treating Customers Fairly’ regime
ensuring consumers are treated in a transparent and honest fashion which protects them
from being sold unsuitable products.
The dealer process for a GAP sale is entirely separate to the vehicle sales process. It is
generally done face-to-face and is not part of a bundle with the vehicle or other products. In
fact, due to FCA ICOB rules8 dealers are obliged to sell insurance products individually with
separate documentation from that relating to the main purchase – the vehicle itself. This
means that, in the view of the NFDA, there are ample safeguards for consumers to protect
them from the potential harms arising from purchases of the other add-on product sales
being considered in the FCA’s current study – such as travel insurance and mobile phone
insurance – where the sales process is less strictly regulated and the purchase is normally
concluded on the same day, rather than over a period of days or week as is the case with a
vehicle purchase.
Dealers’ reputations depend on consumers regarding them as trustworthy and
straightforward to deal with, for what consumers regard as a high value (and therefore
important to protect) item. Dealers’ interests lie in selling GAP products that meet customer
expectation and deliver what is promised. Failure to do this risks the dealer’s good
reputation and a customer will not only not return to buy a subsequent vehicle, but will tell
other consumers not to use the dealer, as they offer poor service and cannot be trusted.
GAP products sold by dealers are well respected products that meet the needs of
consumers buying a car.9 The dealer ensures that the customer is eligible for the product
before sale and that the insurance cover is right for the customer’s needs. GAP products
sold through dealers have only a limited range of exclusions and pre-conditions for a claim,
which in turn leads to a low decline rate.10 Therefore, providing a ‘total loss’ motor accident
can be proven and the attributable motor insurance claim does not pay in full, a GAP claim
will generally be valid and paid.
The NFDA appreciates the opportunity to confirm to the FCA that the existing UK GAP
insurance market is broad, price competitive and has few constraints to entry. Strong
existing regulation has produced sales processes which significantly reduce the risk of harm
to the customer’s decision-making ability, successfully protecting both retailers and
consumers who, in turn, mutually benefit from this balanced and demand-driven market.
8
See specifically ICOBS 6.1.13 relating to ‘price disclosure: connected goods or services’.
This is evidenced by the extremely low “decline” rates experienced by customers of our members. Source:
GAP insurer data set for claims declined in 2012 where the policy holder bought from one of our members.
10
See Annex B for list of exclusions and pre-conditions and see footnote 5 for decline rate statistics.
9
6
Yours sincerely,
Sue Robinson
Director, National Franchised Dealers Association
7
Annex A
Press Release
23 April 2013
Defaqto provides independent assessment of Motor GAP
Insurance policies as FCA reiterates focus on add-on insurance
Star Ratings aim to help people make better financial decisions in this
area
Independent financial research company Defaqto has today launched new Star Ratings for
Motor GAP (Guaranteed Asset Protection) Insurance – providing an independent featurebased assessment of where policies sit in the market – to bring clarity to these products
and help consumers make more informed decisions.
In its Business Plan for 2013/14, published in March, The Financial Conduct Authority
(FCA) stated its intention to focus on general insurance add-on products, including
guaranteed asset protection. Motor GAP Insurance covers car owners from any financial
loss they might suffer if their vehicle is stolen or written off in an accident, covering the
difference if the insurer’s settlement value is not enough to get the claimant back on the
road or to pay any outstanding finance on the vehicle.
According to Defaqto data, there are many feature-rich policies available but, at the same
time, there is wide-ranging variation between the Motor GAP Insurance policies on the
market in terms of the level of cover they provide and the exclusions they include. As a
result, choosing the right policy can be difficult.
Defaqto data shows for example that:

92% of products will pay the car insurance excess following a claim, with £250
being the most common limit
 There are varying policy periods available – with 67% of all policies having more
than 3 policy periods to choose from
 37% of policies allow the cover to be transferred to a different vehicle, should
the car be changed midway through the term – 24% of these apply a fee to
make this change to the policy
 81% of policies offer a maximum benefit limit of over £10,000
Defaqto has today launched a new Star Rating for Motor GAP Insurance to help consumers
see where different policies sit in the market in terms of the features and benefits they
offer. They give policies an independent rating of 1 to 5 depending on their level of feature
quality and comprehensiveness – ultimately to support consumers’ decision-making
process.
8
Defaqto Star Ratings are well established (now covering nearly 50 different product
areas) across banking, general insurance, wealth management, and life and protection
and are based on a robust and transparent methodology – giving consumers an
independent, recognised basis for comparison that they can trust.
As part of the assessment process, Defaqto has undertaken a detailed analysis of
providers’ policy documentation (including policy small print and Key Facts documents)
and selected 24 key features on which to base its assessment of Motor GAP Insurance
policies. The full list of features included in the rating is included in the Notes section
below.
Critically, to achieve a 4 or 5 Star Rating, as well as meeting the required level of feature
quality as a whole, products must also provide a minimum level of benefit against ‘core
criteria’ – these are features which, based on Defaqto analysis, market and industry
developments and dialogue with a wide cross section of providers, are key to a product
representing a high quality offering to consumers. The core criteria identified within
Motor GAP Insurance include:





Coverage for foreign use
Cover for factory fitted optional additions to the vehicle
The claims limit must be at least £15,000
Cover for the motor insurance policy excess
The ability to provide a refund where policyholders cancel the
policy
mid-term
Anna-Marie Duthie, Insight Analyst for General Insurance, said:
“Motor GAP Insurance is a growing area and these policies can offer valuable
added protection against potential financial loss people may suffer if their car is
stolen or written off. However, our research shows that there is marked variation
between what different policies offer, and the circumstances they are aimed at,
making it potentially quite tricky for people to identify the right option for their
needs.
“The single most important consideration when comparing GAP products should
be what a policy covers and excludes – although important, the focus should not
be price alone. In addition, people should take the time to shop around for the
right policy and not rush into a decision.
“The FCA has reiterated its focus on insurance add-on products, and we have
extended our established, independent Star Ratings to cover Motor GAP
Insurance to give greater clarity to consumers in this area. They provide an at a
glance view of where products sit in the market in terms of feature quality and
comprehensiveness – with the aim of supporting consumers’ decision-making
process – and are a natural extension of the detailed knowledge and intelligence
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that we hold on this sector.
Ultimately, consumers should read the small print carefully and seek clarification
from a potential insurer if they are unsure about the cover being offered.”
Consumers can access Defaqto’s Star Ratings for Motor GAP Insurance at
www.defaqto.com/star- ratings/motor-gap-insurance, where they will be able to:



Find 5, 4, 3, 2 or 1 Star rated products and compare their features and benefits
Identify what Star Rating their current product, or one they are considering, has
Access information about Star rated products so they can learn more about what
they offer
-Ends-
The Financial Conduct Authority’s Business Plan 2013/14 was published on the 25
March 2013 and is available on the FCA’s website: www.fca.org.uk.
2. Defaqto has assessed the following key features and benefits in Star rating Motor GAP
3. Insurance policies:
1.
Star Rating Criteria
Maximum Inception Period
Warranty Costs
Description
The maximum number of days following the vehicle purchase that the
policy can be arranged.
The length(s) of time for which cover can be purchased.
The maximum number of months where cover can be deferred.
The gap policy is still in effect when the vehicle is being driven by another
driver.
Use of the vehicle whilst abroad is allowed for a certain number of days
per policy year.
The maximum age of the vehicle in order to be eligible for cover.
The maximum number of miles on the vehicle in order to be eligible for
cover.
Factory fitted options on the vehicle are also covered under the policy.
Dealer fitted options on the vehicle are also covered under the policy.
In the event of a claim, any applicable costs regarding road tax will also
be covered.
In the event of a claim, any applicable warranty costs will also be covered.
Maximum Claims Limit
The maximum monetary amount which can be claimed for.
Policy Period
Deferred Period
Other Driver Allowed
Foreign Use
Maximum Vehicle Age
Maximum Vehicle Mileage
Factory Fitted Options
Dealer Fitted Accessories
Road Tax Costs
10
Glass’s Guide Limit (%)
The limit placed upon the Glass's guide valuation in relation to the
maximum benefit amount to be paid.
Does the policy allow transfer of the cover should the motor insurance
replace the vehicle due to a total loss claim within the first 12-24 months
of the policy?
Does the policy allow transfer of the cover should the insured change the
vehicle mid-term?
The cost of cover to transfer the policy to another vehicle.
Cover for the excess charged by the insurance policy.
The amount of excess charged by the insurance company which is
covered in the event of a claim.
The amount of negative equity that is covered.
The number of days within which a claim must be notified to the insurers.
Transfer Replaced Vehicle
Transfer Changed Vehicle
Transfer - Fee
Motor Policy Excess Cover
Motor Policy Excess (£)
Negative Equity Limit
Claims - Notification
Claims - Helpline
Cancellation Fee
Cooling-off Period
Cancellation Return - Insured
4.
The type of helpline through which claims need to be made.
The fee charged in the event of a cancellation (£)
The length of the cooling-off period.
The type of return which is available following mid-term cancellation by
the insured.
For further information or to speak to Anna-Marie Duthie please contact Defaqto’s
Press Office:


Adam Richards-Gray: 01844 295 556
Email: pressoffice@defaqto.com
Follow Defaqto on Twitter, where you will be kept up to date with latest press
releases, media appearances and expert commentary:
www.twitter.com/defaqtopress.
5.
For further information about Anna-Marie Duthie please visit Defaqto’s website:
www.defaqto.com/adviser/about-us/Media-Centre/Our-people/Spokespeople/AnnaMarie- Duthie/
About Defaqto
Defaqto is an independent financial research and software company specialising in rating,
comparing and analysing financial products and funds.
Since 1994, we have built the largest, whole of market, financial product and fund
database and become one of the leading providers of retail financial data in the UK. We
now cover 17,500 products across banking, general insurance, life and protection, and
pensions and investments – across nearly 160 product types. We also hold data on over
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58,000 funds – including Investment Trusts, Insured Funds, ETFs and Offshore Funds –
integrating Morningstar data with our own, and cover more than 40 platforms across 30
providers.
Our experts validate and analyse the data to provide insight and consultancy to all layers
of the financial services sector including financial advisers, mortgage and general
insurance brokers, product providers, web aggregators and the public sector. This data
also underpins our product ratings, provider and intermediary product research tools and
web services.
You can access further information about Defaqto at www.defaqto.com.
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Annex B
Typical Conditions and Exclusions
Pre-conditions to the cover being capable of claim being on:

The vehicle must be comprehensively insured at the time of incident under a UK Motor
Insurance policy ( the “Motor Policy”);
A Net Invoice Price must be specified on the Certificate of Insurance of the Motor Policy
and must be no more than the maximum vehicle price specified in the GAP cover (e.g.
GAP cover says “£15,000 maximum vehicle price”; Motor Policy Certificate must have a
vehicle price stated of £15,000 or less).
The vehicle type must be listed in Glass’s Guide (industry standard vehicle price guide);
and
The vehicle must be used principally in the United Kingdom.



All the above are easy to factually verify at time of claim on the GAP cover
In the event of a total loss of the vehicle occurring within the Territorial Limits during the
GAP period of insurance, the policyholder must:
 Contact the GAP Administrator prior to accepting any settlement offer made the
Primary Motor Insurer;
 Check with their Motor Policy Insurer whether they are entitled to a brand new
replacement vehicle (if their vehicle was new at the start date of the Motor Policy) or a
replacement vehicle (if their vehicle was not new at the start of the Motor Policy) and
accept that replacement vehicle if they have that entitlement;
 Advise the Administrator if they are not pursuing the total loss on their Motor Policy,
but are claiming against a third party.
Exclusions
No benefit will be payable under the GAP policy in the event of a Total Loss arising in the
following circumstances:





Following theft by any person who has access to the keys of the vehicle (including
family members);
If at time of Total Loss the vehicle is being used for excluded purposes, typically: any
type of competition or rallies, racing, any type of track day, off road, speed testing,
pace-making or reliability trials; commercial business use of hire and reward, including
taxi, courier services and private hire; an emergency vehicle;
If at time of Total Loss the vehicle is being driven by any person not holding a valid
current driving licence;
If at time of Total Loss the driver of the vehicle was intoxicated by alcohol or under the
influence of un-prescribed drugs;
If the policyholder’s Policy provider replaces the vehicle the subject of the Total Loss.
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Inability to recover under the GAP policy – no loss suffered
A customer will not receive a pay-out under GAP if he has experienced no loss. This could
occur in the following circumstances:


A used vehicle, where the purchase price was heavily discounted and below the
actual retail value at the time of purchase may, in the event of a total loss, receive a
pay-out from their Motor Policy Insurer which is in excess of the invoice price paid
for the vehicle. In these circumstances, there would be no financial shortfall and
therefore no pay-out under the GAP policy.
Where the policyholder’s Motor Policy Insurer provides a replacement vehicle in the
event of a total loss (usually within the first year of ownership of the vehicle) and the
policyholder does not accept the replacement vehicle, there will be no pay-out
under their GAP Insurance policy because the customer has deliberately declined the
benefit available under the Motor Policy.
14