Context
Being concerned that Guaranteed Asset Protection (GAP) insurance is failing to provide fair value to some consumers, the FCA wrote to firms manufacturing GAP insurance products in September, asking them to take immediate action to prove customers are getting a fair deal.
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.
Key points to note and next actions
After assessing the responses to its September request for proof of fair value, the FCA was not satisfied. As a result, it has agreed with insurance firms representing 80% of the GAP insurance market to a pause in sales. As part of this agreement, these firms have committed to make changes to their GAP products to provide better value for customers, in line with the FCA rules.
The FCA is also to carry out a second tranche of engagement with the remaining 20% of the GAP market, with the aim of improving the value of the product across all firms.
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. The FCA has 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, the FCA Executive Director, Consumers and Competition, said: “I welcome the agreement by firms providing GAP insurance to pause sales while they work on improving value for customers. 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.”
“We will continue to work closely with firms as we carry out further engagement to resolve these issues and ensure customers are getting fair value products that meet their needs.”
Firms should take this information as read-across for any insurance products they may manufacture, wholesale or distribute and ensure their fair value reviews consider total commission levels as well as total claims outlay as a proportion of premium income. You can view the FCA’s Value Measures Data here.