Earlier this year, car sales looked decidedly weak – they were down 12.4% in the first three months of 2018 to be precise. Then they rallied in April for the first time in a year – a whole 10% better than April 2017. However, no one is predicting a huge upswing in the near future to compensate for a market where people are less willing to buy diesel cars and uncertain about the impact of Brexit.
Deals, deals and more deals
When the market isn’t exactly bounding, there’s a huge temptation for the industry to offer discounts to keep cash moving through the system. Whether it’s an attractive discount off the list price (for instance over 10% off this Toyota) or sweeteners to make the finance look more attractive (several manufacturers pay a contribution to the deposit – like this Audi TT) it pays to shop around.
But what are the implications for insurers?
Insurers value cars according to their list price determined by Glasses Guide which lists the second hand values of each make, models and year of vehicle. It’s this figure which is offered to motorists by their insurer in the event of a ‘write off’ or total loss of vehicle.
As a specialist in GAP insurance, we keep a close watch on new and second hand values – after all several GAP insurance policies are based on making up the difference between these values and getting people back on the road.
If GAP insurance covers the cost of a replacement vehicle matching the original vehicle specification, then surely the costs (and risk) to the GAP insurer is reduced.
However, that’s not the only purpose of GAP insurance. Finance and contract GAP insurance ensures that people who have vehicle finance of one kind or another don’t end up finding significant sums themselves to settle their outstanding finance balance in the event of a total loss.
In a personal contract purchase example, the new car might be discounted quite considerably. This means the up front costs are lower – but the final payment required to take ownership of the car at the end of the contract term (often 3 years) will not be reduced. This residual value is decided at the start of the contract – but in the event of an incident a couple of years down the line the insurer will refer to Glasses Guide for a valuation of the vehicle and this won’t necessarily be in line with the manufacturer’s predictions. So there is a potential for a big difference in values between the prediction at the outset of the contract and the actual Glasses Guide value.
Our analysis is that GAP insurance could become a much more unpredictable market. It’s more important for the consumer (over 80% of new cars are bought with some form of finance in the last 12 months) but also important for the GAP insurer to recognize the risks of the softening car market and adjust accordingly.
by James Cartwright at 17 May 2018, 00:00 AM