Posted: 15th July 2014

Mind the GAP, that timeless phrase that echoes vividly in the mind of every underground and rail commuter. Although we use the term GAP in its insurance form – Guaranteed Asset Protection, an analogy occurs. Whilst I’m sure in this context, falling into the GAP will not bring about the same dramatic results, ‘minding the GAP’ is essentially what the FCA is urging firms involved in the sale of GAP to do.

In its recent market study into insurance add-ons (published March 2014), the regulator has proposed breaking the ‘point of sale advantage’ for GAP insurance, which is usually offered alongside car sales. While the FCA has acknowledged that GAP insurance products do add value for consumers, there are significant problems with the way the product is marketed, sold and serviced.

On the claims side, GAP add-on insurance claims ratios from 2008 to 2012 averaged just 10%. In comparison, the same study found that the claims ratio for travel insurance was 52%. The regulator’s conclusion for this low figure? Something is broken in the sales and administration of this product and customers are left also needing to ‘mind’ the GAP.

The GAP journey

What exactly is it?

GAP insurance covers the difference between the actual cash value of a vehicle and the balance still owed on the financing. If the owner’s car is written off whilst they still owe capital on the loan but the vehicle has depreciated bringing down the value, the difference will be covered.

Minding how it’s sold

The FCA’s research showed that 99% of GAP insurance is currently sold at the point of sale of the car. It was concerned that the GAP sales process in car showrooms often leaves individuals believing that the only source of the product is their chosen car dealer. However, consumers could save a significant amount if they were to shop around. The market study found that an average GAP product at the point of sale was sold for £350, compared to £100-£150 for stand-alone GAP. Consumers cited convenience as a key reason for not shopping around.

Proposed remedies

The FCA invited feedback on the provisional findings and proposed remedies of the market study and is now hosting a series of workshops on GAP and claims ratios. The resulting consultation paper on the finalised new rules is due in the autumn, with the resulting changes to its rules to be introduced in Q1 2015.

In the meantime, if you sell GAP insurance as an add-on product, you’ll want to know the following FCA proposed remedies:

  • Banning the sale of GAP at the point of sale
  • Publication of claims ratios – to “shine a light on poor value products”
  • Deferred opt-in – ask customers to confirm that they want the product in the days following the sale of the primary product

The industry response

The industry response hinges on the fact that GAP acts quite differently to other add-on products:

  • GAP is not purchased and renewed annually, with customers making a single claim in the event of their car being written off by their motor insurer. The assertion by the FCA that the claims ratio of GAP insurance is comparatively too low does not appear to take account of this very specific product feature.
  • Customers may be left uninsured if the sale of GAP is banned at point of sale.

One suggestion from the industry has been that the ‘deferred opt-in’ period for GAP to start at the point the customer orders their vehicle (rather than the point it is delivered). This could meet the FCA’s objective of detaching the sale of the primary and add-on product, give potential buyers time to consider the GAP policy in more detail, ask questions and shop around, while also ensuring that customers do not go uninsured.

What to do now?

As the FCA contemplates industry responses, what new rules the regulator will impose are still far from clear. What is clear though is that the FCA will not stand for poor claims ratios, on expensive add-on products, sold in a market lacking competition. It’s a positive that the industry has recognised the regulator’s concerns and is looking to work collaboratively to identify a workable solution. There is a real opportunity for your firm to take a step forward, review your sales process, products and culture, recognise the regulator’s concerns and then to design products that will be good for the customer, good for business and good for the regulator.


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