Insurers agree to pull GAP over FCA concerns

Eight out of ten insurance firms have agreed to pause sales of Guaranteed Asset Protection (GAP) insurance at the request of the financial watchdog.

The Financial Conduct Authority (FCA) said it will carry out a second round of discussions with those GAP providers that will continue selling the product although it said that these have agreed not to use new GAP distributors in the interim.

GAP insurance is typically sold alongside car finance. It covers the difference between a vehicle’s purchase price or outstanding finance and its current market value, in the event it is written off before finance has been repaid.

The FCA is however concerned that the product is failing to provide value and in September wrote to firms asking them to take immediate action to prove customers are getting a fair deal.

The regulator now says that after assessing responses, it was still not satisfied and that as part of the request to pause sales, firms have committed to make changes to their GAP products.

This action follows findings in the FCA’s latest fair value measures data, which shows that only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims.

It said it had seen examples of some firms paying out 70% of the value of insurance premiums in commission to parties involved in selling GAP policies.

Sheldon Mills, FCA executive director of consumers and competition, said: ‘GAP insurance can provide a useful service to customers, but in its current form it does not offer fair value and we want to see improvements.” 

The regulator said it will consider firms’ proposals for different distribution channels, adding that it recognises that some channels may be able to address its concerns more quickly.

Late last month, an FCA spokesperson told AM, in a statement: “We’re disappointed with the market’s response to our warnings to improve the value of GAP insurance for customers. We have told firms to take immediate action to show how customers are getting a fair deal or we will intervene,” adding that it ‘had no intention of banning GAP insurance as a product line’.

Many Insurers have declined to talk openly about GAP although some have already culled their GAP product.

However one AM100 dealer, who preferred not to be named, told AM: “I actually think the product is a good one when it’s sold and priced in the right way,” although admitted that he had not seen anyone volunteering to sell GAP differently, take a fresh look at the product or to look at selling it in a different way.

The FCA added that it has carried out significant work in the past aimed at addressing issues with GAP insurance, including a market study on insurance add-ons and introducing new rules specifically for GAP insurance.

The FCA’s assessment of the value provided by GAP insurance includes data going back to 2008 and that a 2014 market study indicated that only 10% of premiums were paid out in claims, on average, between 2008-2012.

Since then, the FCA has introduced rules strengthening how insurance firms should assess whether their products are providing fair value.


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