Car dealers are ripping off motorists by charging up to 278 per cent more than insurers for add-on products such as Gap insurance and cover for scratches or tyre damage, according to new research from Which?.
The consumer champion found drivers are typically paying hundreds of pounds more than the average price charged by insurers when they buy cover with a new car due to hefty commission rates pocketed by dealerships.
Which? looked at the cost of buying Guaranteed Asset Protection (Gap) insurance from four car dealerships, and compared the costs to buying the same cover from an insurer directly.
The snapshot investigation found Gap insurance policies – which have recently been investigated by the Financial Conduct Authority (FCA) – bought from a car dealership were up to £367 (278%) more expensive than those bought from an insurer directly, with the majority of the cost not covering the insurance, but going directly to the dealership.
Which? found the cost of purchasing Gap insurance for a Ford Fiesta from a dealership was £499, but only £132 on average when purchased directly from an insurer.
Even the smallest disparity for Gap insurance was 102 per cent – for a Honda CR-V SUV that cost £415 from a dealership, but just £205 on average from an insurer directly.
Which? also found that cosmetic and dent insurance was almost 60 per cent cheaper to buy from an insurer directly than from a car dealership, and alloy wheel and tyre insurance was up to 26 per cent cheaper bought from an insurer than from a dealership.
While Gap insurance can be worthwhile, particularly for those buying their car on finance, the selling of Gap insurance came under scrutiny from the FCA earlier this year, after it found numerous examples of dealerships receiving high and potentially excessive levels of commission.
Where standard car insurance may only cover what a car is worth at the time of an incident, Gap insurance pays out the difference between the original cost of a vehicle and what an insurer will cover if it is stolen or written off, meaning a driver isn’t left out of pocket when the value of a car decreases over time.
The FCA report found the average level of commission (after Insurance Premium Tax) taken by car dealerships when selling these policies was 71 per cent. It also found that car dealerships selling scratch and dent insurance were receiving an average commission of 54 per cent.
The FCA also found examples of Gap products being sold to ineligible customers who did not need the cover, prompting concerns about potential mis-selling.
Some firms were found to be pushing the insurance through distributors where some or all of the vehicles being sold were second-hand, meaning the product was often unnecessary or of nearly no value.
Since publishing its findings, the FCA has warned insurers not to allow dealerships to receive commission ‘which bears no reasonable relationship to the costs or workload to distribute the product’.
Jenny Ross, Editor of Which? Money, said:
“We’re really concerned that car dealers are continuing to pocket huge commission fees from selling insurance products at rip-off prices, despite recent scrutiny from the financial regulator.
“The FCA needs to keep a close eye on these practices and be ready to step in with strong action if consumers face mis-selling or unreasonable charges for these products.”
Notes to editors:
Which? contacted four car dealerships (Ford, Honda, Lexus and Toyota) and seven online independent insurers (ala.co.uk, car2cover.co.uk, click4gap.co.uk, directgap.co.uk, gapinsurance.co.uk, shortfall.co.uk and totallossgap.co.uk) to compare premiums for Gap insurance. For cosmetic scratch and dent cover and alloy wheel and tyre insurance, we compared prices from a Ford dealership with the same seven independent insurers.
Which?’s Consumer Insight Tracker found that car dealers are the least trusted industry among consumers, with 55 per cent of respondents in July 2019 saying they distrusted car dealers. For more information, visit: https://consumerinsight.which.co.uk/tracker/trust?search%5Bdate_from%5D=1907&search%5Bdate_to%5D=1807&search%5Bsort_by%5D=unsorted
For the FCA’s General Insurance Distribution Chain Thematic Review (April 2019) please visit: https://www.fca.org.uk/publication/thematic-reviews/tr19-02.pdf