- GAP insurance covers the cost of a car’s loss of value if it is stolen or totaled
- But the coverage is mired in controversy over extremely low loss rates.
- The regulator has intervened and most insurers have stopped selling these deals.
The GAP insurance market has undergone the biggest shake-up in its history, with 80 per cent of deals withdrawn from sale after the regulator intervened.
The Financial Conduct Authority (FCA) today said a number of insurance firms have agreed to suspend the sale of GAP insurance, formally known as ‘Guaranteed Asset Protection’.
GAP insurance covers the loss of value of a car if it is written off or stolen, as vehicles often depreciate quickly.
It is typically sold as a stand-alone policy or as an add-on to other types of financial arrangements, such as auto insurance.
Wheeler Dealership – Car dealers sell a lot of GAP insurance along with new cars
But the GAP insurance market has been hit by controversy, as the FCA has been investigating concerns that policies are rarely being claimed.
This is Money previously reported that the average GAP insurance policyholder claims only once every 300 years.
Now the regulator said 80 percent of the GAP insurance market has agreed to stop selling new policies.
The FCA said: “The FCA is concerned that the product does not provide fair value to some consumers.”
The regulator will now speak to GAP insurers “with the aim of improving the value of the product across all businesses”, the FCA said today.
In September, the FCA wrote to companies selling GAP insurance asking them to demonstrate that customers were getting a fair deal.
But the regulator was unimpressed with the responses and asked affected companies to change their insurance arrangements to offer better value to customers.
The FCA previously found that only 6 per cent of The amount customers pay in premiums for GAP insurance is paid in claims.
In comparison, automobile insurers pay 64.51 percent of premiums for claims and motorcycle insurers 60.67 percent.
The FCA has also seen examples of some firms paying 70 per cent of the value of insurance premiums as commission to parties involved in the sale of GAP policies, such as car dealers.
FCA Executive Director of Consumer and Competition Sheldon Mills said: ‘I welcome the agreement of companies offering GAP insurance to suspend sales while they work to improve 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 businesses as we further engage to resolve these issues and ensure customers get fair value products that meet their needs.”
Why don’t drivers claim GAP insurance?
Some may not even know they have this insurance.
When this insurance is sold, especially as an add-on to a larger primary policy, customers often don’t realize, or forget, that they have any coverage at all.
When GAP insurance is claimed, it is almost always paid, suggesting that many customers do not know they are covered in the first place.
In fact, standalone GAP insurance has the highest payout rate of all insurance, at 99.3 per cent, with an average claim of £529.86, when customers actually make a claim.
That drops to 95.59 per cent for the additional GAP, with a standard claim of £2,201.