’Gap was probably at the highest of everybody’s list in terms of a product that was ripe for being targeted and corrected,’ says chairman

When the FCA implemented its new Consumer Duty regulation in July 2023, providers of guaranteed asset protection (Gap) insurance came firmly under the spotlight.

Just two months after the new rules were introduced, the regulator issued a firm statement explaining that it felt the product was failing to provide fair value to some consumers.

As a result, it wrote to providers asking them to take immediate action to prove customers were getting a fair deal when buying Gap insurance.

But, in a bombshell update on 9 February 2024, the FCA announced that 80% of the Gap market would be suspending sales after reaching an agreement with the regulator.

Why? Because after assessing responses to its information requests, the regulator was not satisfied.

In a statement sent to Insurance Times before the suspension in sales was announced, the FCA said: “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.”

Stephen Kennedy, director of insurance pricing at Pearson Ham, told Insurance Times that it did not come as a surprise when the FCA announced the suspension of Gap insurance sales.

“It is part of the ongoing drive to improve services that customers are receiving and making sure that customers understand what they are buying when they purchase insurance products,” he said.

“I can understand why the FCA got involved and why some of the sales have been suspended while the investigation goes on.”

Right to target?

So, all this leaves one question – why does the FCA think Gap products are failing to provide fair value?

Gap insurance is an add-on to motor insurance that covers the difference between a vehicle’s purchase price and its current market value.

According to Insurance DataLab’s analysis of FCA value measures in February 2024, Gap insurance paid out just 7% of premiums in claims in 2022 when sold as a standalone product – for add-on policies, this figure was as low as 4%.

The FCA’s own data, cited by the regulator since September 2023, revealed that there had been instances of some firms paying out up to 70% of the value of insurance premiums in commission to parties in the distribution chain, such as motor dealerships.

Therefore, in an age where fair value is more important than ever due to Consumer Duty rules, the FCA was always going to put its foot down if it felt this was not being provided.

The duty requires firms to measure, analyse and benchmark their performance across a number of metrics to bolster service.

These metrics include products and services, fair value, consumer understanding and consumer support.

Julian Tomlinson, chairman of claims management and legal services firm Alps, felt it was right that Gap insurance had been targeted by the FCA – especially if the product was being sold with a higher insurance premium tax (IPT).

“The FCA pursuing Consumer Duty and fairness is a really good thing,” he added.

“Gap was probably at the highest of everybody’s list in terms of a product that was ripe for being targeted and corrected.

“It’s easier to target a product if you can see there is 20% IPT attached to it, for example.”

Kennedy added that “high pressure sales techniques” in places such as motor dealerships would not have pleased the FCA either.

“That causes a problem for the FCA because they’ll look at it thinking ‘it is actually not that competitive, you are taking people out of the competitive environment’,” he explained.

“That is something that can cause concern – and then there’s a bit of lack of customer awareness or understanding about what they are actually buying.

“So, that’s another problem for the FCA, thinking about Consumer Duty and consumer understanding.”

FCA criticised 

However, while problems with Gap insurance have been pinpointed by market commentators, the FCA has also been criticised in its handling of the situation.

Simon England, managing director and founder of online provider ALA Insurance, claimed that “its language is causing confusion among consumers and negatively impacting the entire industry”.

He felt that part of the problem was the FCA regarding car dealerships, lease and finance providers and online providers as one entity.

“We’ve provided Gap insurance to customers for nearly 20 years at ALA Insurance and have a deep understanding of Gap insurance and how vital it can be to consumers,” he said.

“As an online provider, we aren’t in the same category as car dealerships and the underwriters associated with those policies – but we are within the same industry and sell the same product.

“The FCA’s unclear and inconsistent language around Gap insurance is damaging to all those [that] sell the product and, from our experience, many car dealerships are a great advocate and introducer of the product.

“Those [that] sell the product responsibly and within the guidelines of the FCA are, due to the FCA’s sweeping comments, collateral damage by association.“

David Burns-Keane, managing director of GAPinsurance.co.uk, added that while the FCA’s investigation had the “potential to significantly benefit the UK consumer”, it was crucial that the FCA also provided clarity on the process.

“The lack of clarity and differentiation from the FCA concerning the motor dealer and online markets poses a potential threat to certain independent providers of Gap insurance,” he said.

“This is particularly impactful for those [that] collaborate with underwriters that offer capacity to both markets.

“While I genuinely support the FCA’s goals, the casual attitude toward the collateral damage [it is] causing is alarming and calls for an immediate reassessment.”

The future

So, with there being uncertainty around Gap insurance at the moment, what is next for the product?

Looking at the FCA’s statement, its view is clear – Gap insurance “does not offer value” in its current form.

Sheldon Mills, executive director of consumers and competition at the FCA, 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.”

Kennedy added that the product does have a role in the market and that there was a space for it, but he felt there needed to be more transparency around it.

“It is about making sure that customers understand what they are buying and that there is transparency around it,” he said.

“Customers [need to] have a good understanding about what they are buying, what it does cover and what it will cover.”

Tomlinson noted that Gap insurance was a “really valuable product” and that it can offer good value to customers.

“It’s a great and necessary product that provides peace of mind,” he said.

“The FCA [is] right to not ban the product – [it is] just looking at it and saying there are a number of measures for Consumer Duty.

“There is going to be a fantastic opportunity for insurance brokers to work with their clients and say ‘it’s still here, it’s still available and it still offers incredible value’.”