The FCA have undertaken an evaluation of their intervention into the Guaranteed Asset Protection Insurance (GAP) Market, which took place from September 2015. The intervention followed the FCA’s Market Study of Add-on insurance products, in which the FCA concluded that there were concerns with the add-on GAP market. The FCA proposed the review in their 2018/19 Business Plan. The NFDA supported the review having asked for the interventions to be evaluated, once they had been put in place, to ensure they were effective and not going to be detrimental to the GAP market and consumers.
FCA concerns about Add-on GAP
Following their Market Report into Add-on GAP the FCA concluded that consumers were receiving poor value for money from the product. They based this on the following:
- On average only £10 in every £100 paid in add-on GAP insurance premiums was paid out in claims. This was a 10% claims rate which was much lower than other general insurance products.
- Consumers focus on main product and the add-on nature of GAP products weakens consumer engagement and decision making.
· Of the 5 add-on products reviewed, GAP insurance accounted for over half the estimated over payment of add-on premiums.
· Consumers often bought GAP without previously considering the product or shopping around.
· Dealers enjoyed a strong point of sale advantage meaning little or no pressure to reduce prices.
· Lack of information about alternative providers preventing consumers comparing products.
How the FCA Intervened in the GAP market
From 1 September 2015 the FCA introduced measures to address the consumer harm they perceived existed. These measures were: -
- Introduction of ‘Prescribed Information’ to give consumers the information they needed to make an informed decision to allow them to shop around.
- Introduction of ‘deferred Opt-in’ so that the conclusion of a GAP sale cannot happen until 2 clear days following the giving of ‘Prescribed Information’.
The FCA expected the introduction of the measures to:
- Improve competition between add-on and stand-alone sellers of GAP and increase stand-alone sales.
- Give better consumer outcomes, i.e. better-informed consumers making more active decisions.
Findings of the Evaluation Report
Sales Analysis
The FCA expected the share of add-on GAP to fall following their intervention, although they expected total sales of GAP products to increase as the new car finance market expanded. In reality GAP insurance sales fell by 4% from just under 1.1 million per year to just over 1.0 million per year post intervention. The fall was most noted immediately after the implementation in September 2015 and has recovered slightly since. Total GAP penetration rates pre-interventions were 38% (add-on only 36%) and post intervention 37% (add-on only 34%) post intervention.
Add-on insurance sales has decreased in absolute figures since the FCA intervention, falling from 1,012,000 to 996,000 policies per annum. Whilst stand-alone GAP insurance sales have risen significantly from 61,000 to 96,000 policies per year. Stand-alone GAP now accounts for 9% of the market compared to 6% pre-intervention. The FCA expected add-on GAP sales to fall post-intervention by between 10% and 32%, in reality the actual fall is estimated by the FCA to be between 16% and 23%. The figures suggest the switch by consumers from add-on to stand-alone insurance GAP has been small and much lower than the FCA had expected.
The result of the intervention is for consumers in some cases to have stopped buying GAP rather than switch to standalone GAP, which the FCA had expected. The FCA believe this is because:
- Consumers have not bought GAP because the product was unsuitable for them.
- Convenience
- Not needing to search for a standalone product.
- Peace of mind knowing they are covered
- Being able to buy GAP insurance in person (rather than by phone or on-line)
· Stand-alone product is more suited than the add-on one but did not buy at all.
· Add-on product was appropriate, but intervention caused them not to buy. These consumers might have valued some of the benefits of add-on insurance such as:
Price Analysis
The FCA expected GAP prices to be higher post intervention as disposable incomes rise and consumers become more willing to pay higher prices for GAP. In fact, prices have only risen slightly in real terms from £363 re-intervention to £367 post intervention. A minor fall in prices occurred in the year directly following the intervention. The greatest impact on price was with add-on insurance, which the FCA believe is due to the increasing numbers of cars being financed giving consumers more ability to pay at point of sale.
Prices of stand-alone and add-on GAP have diverged as prices for stand-alone GAP fall and add-on GAP increase. Prior to intervention standalone GAP prices averaged £186 and add-on £375. Post intervention stand-alone prices fell 13% to £162 and add-on increased 3% to £387.
The FCA suggest that changes in policy cover may explain some of the price changes with add-on GAP but not all. They also argue that additional compliance costs should not be causing increases in prices. The fall in prices for stand-alone could be down to the cost of sales being spread more widely as more policies are sold but the FCA does agree that this is likely to have only a modest impact.
Risk was also seen as a potential factor in price changes. Underwriter prices increased 12% for add-on GAP post intervention, whilst falling 9% for standalone. The FCA think it is possible that some consumers who feel they have a lower risk profile have decided to stop buying add-on GAP making the overall risk for underwriters much higher.
The FCA estimated that prior to intervention their measures would reduce the price of GAP from between 0 – 16.7%. In reality it has fallen between 1.8% and 3.4% overall.
The FCA analysis suggests that more consumers have left the GAP insurance market rather than moved to a stand-alone provider and this is used as a possible explanation for only a modest price fall.
The FCA have concluded that rather than increasing market competition their intervention may have reinforced the segmentation of the market. Although the two markets compete for customers they do in reality serve two different types of customers. A further factor is the lack of new entrants to the standalone market which has meant competition between firms has not increased.
The FCA also admit that stand-alone insurers are relying on add-on sellers to inform customer about the existence of GAP through the prescribed information and without this stand-alone insurer may have a much lower profile with consumers.
Consumer Survey Findings
The FCA asked PWC to undertake some consumer research during February 2018. This followed a pre-intervention survey in 2014. Although the survey did not directly compare they FCA used the results of both surveys to see if consumers attitudes to GAP has changed.
In 2018 Survey the FCA found:
- 54% of consumers who bought a car within the past 12 months discussed or considered GAP
- 82% of those who bought choose add-on GAP (18% standalone)
· 45% did not consider GAP
· 28% Considered GAP but did not buy it
· 26% bought GAP
Recall of receiving prescribed information was high at 74% for those who were offered GAP and 78% of those who bought.
Recall of the deferred opt-in was lower with 63% believing the sale was concluded on the same day. The FCA note that this could be dealers not adhering to the rules, but it is very difficult to prove this is the case from the survey results as consumers recollection maybe different to what happened.
Impact on shopping around
The FCA believed their intervention in the GAP market would alter consumer behaviour making them shop around or stop buying GAP altogether. However, the consumer survey suggests nearly half (49% add-on, 53% stand-alone) of all consumers have decided to buy GAP before purchasing their new car meaning the intervention were likely to have little impact on these consumers.
For customers who had not decided to buy before purchasing the car the intervention has increased shopping around. There is also some evidence that the deferred opt-in has affected consumers who decide not to buy GAP. Of the consumers who had intended to buy GAP, 40% decided not to follow the enforced delay in concluding the purchase. The survey does not give a clear indicator that the delay itself caused consumers not to buy but the FCA think it is likely that it did.
The survey also showed that there is a greater proportion of consumers who are repeat purchasers of GAP following the FCA’s intervention, up from 33% to 66% for add-on insurance and 36% to 57% for stand-alone insurance. Interestingly the survey showed that two thirds of previous GAP insurance buyers had decided to purchase GAP again before committing to purchase the car compared to only 20% of first time GAP buyers.
Shopping around more than doubles post intervention suggesting consumers were more engaged in the decision making process. 75% of consumers spent between 30 minutes and 2 hours shopping around. Those who bought add-on GAP shopped around the least whilst those who bought stand-alone GAP did the most.
For those who bought GAP but did not shop around the main reason given was being happy with the price. However, a significant number of those buyers were not aware they could shop around but this is contradictory to the finding that consumers claim to read the prescribed information. The FCA suggest this might be because: -
- The information about shopping around is not being included by all dealers
- Some consumers may have overstated how thoroughly they read the information
· The information is being included but is not prominent
· The information is being included but consumers do not understand it
The findings of the survey suggest the influence of the salesperson is important in the decision to buy add-on GAP. However, this influence appears to have fallen post intervention with 32% of consumers saying it was important in their buying decision compared to 78% prior to intervention. Other reasons for buying add-on GAP such as convenience are now nearly as important.
Consumers who buy GAP appear more confident with their purchase post intervention. For add-on buyers 95% are now ‘somewhat confident’ compared to 79% pre-intervention. For standalone GAP it is 94% and 97% respectively. It would appear to be some link between confidence and engagement in the process. Also, GAP insurance knowledge for add-on buyers has shown signs of improvement.
Consumers were asked about the usefulness of the measures for them. Add-on GAP buyers found the ‘Prescribed Information’ the most useful, whilst standalone GAP buyers found the opt-in the most useful.
OVERALL EFFECT OF INTERVENTION
Claims Ratios
One of the major factors for the FCA’s intervention in the GAP market was the low claims ration for GAP insurance. The FCA acknowledge claims ratios were increasing prior to intervention and the trend has continued post-intervention. However, the rise in ratios post-intervention has been very small up just 0.6% to 3.1% for policies in their first year. An increase in claims is stated for the major driver for this increase and therefore not necessarily due to the intervention in the market.
Compliance Costs
The FCA estimate the implementation costs of the new measures was between £5million and £8.2million, which falls within the FCA pre-intervention forecast. They also estimate in the report that on-going cost for the sector is likely to be around £1.4million, which is higher than their initial estimate of ‘minimal’. The FCA believe the additional cost is down to on-going staff training.
Consumer Surplus
Consumer surplus is a measure of consumer benefit from the intervention. The FCA believe this has happened through: -
- Some add-on GAP insurance consumers making more appropriate purchasing decisions.
- There being greater awareness that GAP insurance can be bought as a stand-alone product, leading to a subsequent increase in standalone sales.
· Some add-on GAP insurance consumers shopping around and finding a better price for the same coverage in the stand-alone market
The FCA state that consumers benefit from the GAP market has increased from £26m to £28m a year after intervention. Although this is an increase it is much lower than the FCA anticipated pre-intervention. The reasons the FCA give for this is: -
- No decrease in add-on GAP insurance prices following the FCA intervention
- Lower than expected increase in stand-alone GAP insurance sales (either from substitution or new consumers entering the GAP market.
LEASONS TO BE LEARNED
The FCA have identified 5 lessons to be learnt from their intervention in the GAP insurance market.
- FCA intervention had a stronger impact on sales than prices.
- The sales person still plays an important role in convincing consumers to buy add-ons.
- Attempts to break the point-of-sale advantage for ‘sold’ product ate likely to reduce total purchases, rather than divert consumers to the non-point-of-sale market.
- Pre-intervention expectations should be based on a range of evidence.
- Add-on sellers play an important role in introducing the product to buyers in their absence, in their absence the stand-alone market maybe smaller
NFDA COMMENT
The FCA’s intervention in the GAP Market appears though to have reduced the overall sale of GAP meaning some consumers who would benefit from the product are now not buying it. The deferred opt-in period appears a significant factor putting off consumers from buying possibly because it is no longer as convenient to purchase GAP. The FCA also appear to have misunderstood the willingness of consumers to witch from buying an add-on GAP to a standalone one.
More positively the FCA intervention appears to have given consumers a better understanding of GAP insurance and consumers have responded positively to being given ‘Prescribed Information’ before they buy. The information also appears to have played an important role in making consumers aware of GAP and its benefits. The FCA have admitted that without dealers introducing GAP to consumers they would not be aware of it and that in turn this is a service to stand-alone providers acting in effect acting as free marketing for them.
There is no indication from the FCA that they will do any additional work on GAP. The report suggest that they will use the findings to help with work in other markets where we hope they will have learnt from their intervention into GAP.
