What the FCA's deal with GAP insurers could mean for the motor insurance market

Customer outcomes come first – but how do we get there?

What the FCA's deal with GAP insurers could mean for the motor insurance market

Motor & Fleet

By Mia Wallace

Last September, the Financial Conduct Authority (FCA) sent letters to insurance firms providing evidence that some Guaranteed Asset Protection (GAP) products may not be giving consumers a fair deal. Earlier this month, the watchdog followed up, reaching an agreement with GAP insurers to suspend sales, a decision impacting firms representing 80% of the market share for this product.

How the market reacted to the FCA’s decision

Providing insight into the thought process behind this decision and what it will mean for motor insurers, NTT Data’s Ralph Tucker and Dominic Rowles discussed their reaction to the news.

Industry lead of insurance technology at NTT DATA UK&I, Tucker (pictured above) noted that given the FCA’s firm stance on fair value, the industry's reaction was, “about what we expected”. Eighty per cent (80%) of the market is a high number, he said, but insurance is an industry that relies on consumer trust. So, firms, being well-versed in regulatory compliance, were quick to recognise the need for action and demonstrate readiness to adapt their practices.

"We can see that this pause was an acknowledgment of the shift from a seller-centric model to one that's customer-centric,” said Rowles (pictured embed right), head of automotive at NTT DATA UK&I. “The automotive sector is acutely aware that today's consumer demands value, transparency, and fairness, and regulators are there to ensure they get it.

“So, the surprise isn't that so many players agreed to pause sales, but rather how swiftly and decisively they've acted. It's a testament to the automotive industry's capacity for change and its commitment to putting its customers’ needs first.”

Where this decision fits in with the wider regulatory ecosystem

Identifying where this decision fits in with the broader regulatory landscape, Tucker highlighted that it is consistent with the FCA’s efforts to ensure fair value and customer-centric practices in the insurance sector.

“Under Consumer Duty, firms have a responsibility to secure positive outcomes for their customers – and one of the four categories of outcome revolves around price and value,” he said. “There is a massive uninsured customer base in the UK, and the only way firms can reach those people is to create great customer experiences underpinned by genuinely competitive and fair pricing strategies.”

This move resonates with the broader shift in the automotive and insurance industries towards prioritising consumer interests, Rowles said. And it’s important to emphasise that Consumer Duty explicitly considers firms’ data strategies to make sure they can identify, monitor, evidence, and stand behind the outcomes of their customers’ experience.

Understanding the link between data and customer outcomes

With the link between data and customer outcomes in mind, Tucker examined what this move by the FCA could mean for AI pricing algorithms – and for motor insurers more generally. Traditional pricing algorithms will need to undergo significant changes, he said, particularly to take account of new data sources, including non-traditional risks and economic impacts that have recently developed.

What insurance firms need are flexible algorithms, able to absorb data from multiple sources, he said, and AI models with clear, traceable decision-making that they can use to justify how they provide fair value to consumers. This will likely require more thorough data strategies, with many firms struggling to reconcile a whole suite of legacy applications and data siloes.

"In the automotive sector,” Rowles said, “we’ve already seen a lot of noise around original equipment manufacturers (OEMs) like Tesla selling insurance policies at the point of sale. We might see more reluctance there as the regulatory burden gets heavier. The AI-driven pricing models currently in use will have to align more closely with the principles of fairness and transparency, which could lead to a re-evaluation of how car insurance is priced."

From his perspective, Tucker said, the FCA’s recent warning about the improvement needed in treatment of vulnerable customers and claims-handling processes makes it clear that motor insurance firms do recognise the need to secure positive outcomes their customers. And he highlighted that the trend towards customer-centricity, marked by an emphasis on superior customer experience, is gaining traction in the industry.

Rowles said he believes that, from an automotive perspective, the jury’s still out on just how well this imperative is being recognised. Most people don’t see any benefit from their insurance companies until they have a reason to make a claim, he said, and at that point it’s a lottery.

“Sometimes you will have a luxury modern experience with replacement cars and hassle taken away from the consumer, and other times it’s a big argument,” he said. “Furthermore, the insurance companies are a large part of young people not getting into the habit of owning a car. As a result, they are starving the market of a future revenue stream.”

The need for big picture thinking in insurance

“There is a lack of big picture thinking across the market. The focus isn't just on offering coverage anymore, it extends to providing value-added services that enhance customer experience and loyalty,” Rowles said. “Today's successful companies are building their entire business around the customer, knowing that a good experience equates to loyalty."

As to whether motor insurance firms are doing enough to support the shift towards meeting consumer expectations, Rowles said that efforts are certainly underway, but as consumer expectations evolve, so too must the strategies of motor insurance firms. This means offering incentives to safer drivers, he said, and that requires firms to understand customers at a much deeper level. Achieving this will require a re-evaluation of current practices, investment in new technology solutions, and a commitment to continuous improvement.

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