Insurers have been given three months to prove customers are getting a fair deal on guaranteed asset protection insurance (GAP insurance), and it has been argued that there could be a case for banning car dealerships from selling the product when they make a vehicle sale.
The three-month ultimatum, which originates directly from the Financial Conduct Authority (FCA), comes as the financial regulator looks to clamp down on firms that fail to offer fair value to consumers.
FCA data analysis of general insurance firms and products in 2022 found that just 6% of the amount that customers pay in premiums for GAP insurance is paid out in claims, with some firms paying up to 70% of the premium value in commission to other firms in the distribution chain, including motor dealerships.
GAP insurance accounted for total retail premiums written of more than £308.4 million in 2022.
“If an insurer is only paying claims worth around 6% of premiums, then it’s clearly not offering fair value to its customers,” said Fairer Finance managing director James Daley.
GAP insurance covers the difference between the amount paid for a vehicle and its market value in the event of a total loss scenario. The insurance product is often purchased with a new car.
“GAP insurance is usually sold by car dealers - at a time when the customer is already navigating a very large purchase, and is unlikely to have the opportunity to shop around,” Daley said.
“There’s a case to be made that selling this insurance at the point of sale should be banned altogether. But if dealers are to continue selling it, they are going to need to work much harder to choose insurers who can offer much more competitive prices, which are in proportion to the likelihood of making a claim.
“Let’s hope the FCA builds on this momentum and starts to shine a light on other sectors - as GAP insurance is by no means the only insurance sector where poor value is being offered to consumers.”
The Fairer Finance managing director said it was “encouraging” to see the financial services watchdog using Consumer Duty rules, which came into force in July, to challenge insurers on fair value.
An insurance industry insider and compliance consultant queried the rate of commission being paid to car dealerships, labelling this “clearly yet another rip off”.
“[On the question of] whether the cover is priced correctly, to allow a commission of 70% to the motor dealer would suggest not – and I would struggle with how an insurer deemed that large a commission represents around five to 10 minutes of a motor dealer’s time,” said Branko Bjelobaba, Branko principal.
According to FCA analysis of 2022 insurance data:
In a letter to insurance CEOs, dated September 20, the FCA pledged to intervene where firms fall short of expectations, “in line with our actions announced on the sale of GAP insurance”.
Other issues highlighted included discriminatory pricing practices, motor claim undervaluation, general insurance pricing practices rules (GIPP) failures, vulnerable customer identification issues, poor business interruption claims handling, and settlement delays, in addition to commission and fair value issues more broadly.
Insurance firms have also this year been challenged on fair value in buildings insurance for blocks of flats, after the regulator found that many brokers and insurers had failed to evidence fair value when arranging or providing cover, with some unable to supply information to justify commissions paid to third parties, including property managing agents.
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