Car dealers may be forced stop selling GAP insurance

The Financial Conduct Authority (FCA), which regulates insurance providers, has asked some insurers who sell GAP insurance via car dealers to withdraw the product from sale as part of a review it is conducting into the value of the product for consumers. This has effectively put a blanket ban on dealers from selling guaranteed asset protection (GAP) insurance.

The FCA has also asked online GAP providers to submit a fair value submission, which it will review to decide if they will be allowed to continue selling the insurance cover. It originally set a deadline of 31 March for all providers to withdraw the product, but this has now been extended to 30 April, according to information supplied by GAP insurance provider ALA. If a provider’s submission shows fair value and best practices, they will be able to continue to sell GAP insurance beyond April.

What is GAP insurance? 

GAP insurance is a form of cover that pays out the difference between a car’s current market value and the cost of a new replacement if it is written off in the first few years.

The FCA started its latest investigtion into GAP insurance in September 2023, when it wrote to some providers expressing concerns that their GAP products didn’t represent good value for buyers. It warned that it would take action if providers didn’t demonstrate that customers were getting a fair deal.

According to FCA figures, only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims. However, some insurers have paid out up to 70% of the value of premiums in commission to those providing the cover – notably car dealers, which sell around 90% of GAP policies. 

An FCA spokesperson told Car Dealer the body was “disappointed” with the market’s response to its warnings, and said it has “told firms to take immediate action to show how customers are getting a fair deal or we will intervene.”

Although this means car dealers are no longer able to offer the cover, it should still be available for consumers to buy direct from online providers. That said, the review may also affect some independent online companies that offer the cover in the short term, if they’re using the same insurance company as car dealers, but it should not affect their longterm ability to sell GAP provided their submission of fair value is accepted by the FCA.

While the FCA’s action is aimed at helping to ensure consumers get a good deal on GAP insurance, it may also have a detrimental effect, as Simon England, managing director and founder of ALA Insurance explains: “The FCA is claiming it is on the side of the consumer, but… it is damaging the reputation of a product that benefits thousands of car owners.”

England points out that more than 90% of GAP insurance has historically been bought via car dealers, and if they are no longer offering it, there is a risk that a large proportion of new car buyers will not get to hear about it at all, and then miss out on the potential benefits if their new car is written off.

He is asking the FCA to issue a statement confirming the April 30 deadline so consumers know what is happening with the product. "Customers rely on GAP insurance to safeguard their financial well-being in unforeseen circumstances, and any uncertainty regarding its availability could potentially leave them unprotected. Thus, a clearer timeline from the FCA would not only alleviate concerns among consumers but also enable us as providers to better plan and communicate with our clientele, ensuring uninterrupted access to this vital protection,” he commented. 

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