In July 2013, the financial regulator, Financial Conduct Authority (FCA), announced a review into the sale of general insurance add-ons, i.e. where they form an addition to the primary purchase.
In terms of the motor trade market, this will include supplementary products to vehicle sales such as GAP Insurance and car paint/fabric protection insurance.
The report findings have just been released, and the outcome is likely to lead to sweeping changes across the motor industry.
Why is the FCA investigating?
Under its remit, the FCA is bound to investigate and regulate competition across the financial services industry, and it looks to promote competition rather than wait for problems to materialise.
This follows work commenced by the previous regulator (Financial Services Authority) in 2012, where concern was expressed that consumers did not fully understand what these insurance products covered and whether they represented value for money.
What did the study look at?
A vital area of the study is outlined in the FCA “theories of harm” which identifies potential areas where add-on sales may limit how far consumers explore alternatives or base their decisions on relevant measures of price or quality.
This is an extract of some specific areas of review from the FCA paper:
- The nature of the add-on sale may inhibit a consumer’s desire to shop around.
- The sale may be based on consumer concerns that have increased during the sale process – for example, if the consumer has just purchased a valuable item and as a consequence has a heightened perception of risk, which creates a desire to purchase insurance cover.
- Consumers may consider the price of an add-on product against the cost of the primary product, rather than against the price of relevant alternatives.
What was the FCA testing?
This is not a mis-selling review, but a general competition review, looking at whether prices are excessive against the quality of product provided.
Prices were reviewed against standalone products available in the marketplace and margins/profits across the distribution chain from both providers and dealers.
The FCA also compared the cover provided to see if products provide what consumers could reasonably expect. Other areas reviewed include: the details of cover, volumes of claims, claim rejections and any complaints.
What are the FCA Proposals & what does that mean to a car dealership?
The regulator is keen to strengthen competition in these markets and ensure that the product receives the clear and meaningful attention of the customer, i.e. it is not a distracted sale as part of a more significant purchase (e.g. a car).
The FCA proposals will impact the motor industry in three key areas by:
- Deferring the “opt-in” on add-on sales of Guaranteed Asset Protection (GAP) – The FCA will break the point of sale advantage enjoyed by those selling add-on GAP by mandating that:
- The GAP or another add-on sale CANNOT be concluded at the point of sale of the car or car finance
- The consumer MUST be given information about alternatives if the product is offered at the point of sale
- Ban pre-ticked boxes (so-called ‘opt-outs’) for the sale of add-ons because of the negative impact they have on consumer behaviour and consumer outcomes.
- Require firms/insurers to publish claims ratios – to shine a light on low-value products and increase pressure on firms to improve product value.
The FCA is asking for feedback on its findings and proposals by the 8th April using its online form. It will then carry out a cost-benefit analysis and formal consultation before announcing final guidelines before the end of 2014.
As a Motor Dealer, what action should I be taking?
GAP & other “Add-on” product providers have been working with motor traders to review processes and products to ensure that robust processes are in place which enables customers to make an informed purchase.
However, it is worth taking some time to look at your circumstances, for example:
- Review and compare the products you offer against the competition (direct sole providers), how do they fair on cover and price?
- Look at your product range, are you offering a suite of products or enough choice for customers?
- Take some time to fully understand the earnings/commission of all parties, including your dealership, put yourself in your customers' shoes, does this feel like value for money?
- Review your overall earnings from motor trade insurance add-ons over the last 12 months, how could the proposed changes impact your current sales journey?
- What would be the impact on your business if you stopped selling add-ons or if you referred details to a specialist insurance provider?
Next steps – delight your customers!
Improving transparency and product awareness is a positive thing. Why not get on the front foot and make your dealership stand out from the crowd?
There is no doubt that GAP Insurance has a place and has proved invaluable to many customers – if the buying experience is clear, concise and offers excellent value for money then people are highly likely to tell others.
You will have an army of advocates!
One possible benefit of a reduction in financial services activity is your exposure to Professional Indemnity claims, your motor trade Insurance broker should be able to advise you further, or why not contact Insync Insurance for a free review.