City watchdog clamps down on poor value ‘add-on’ car insurance

12th December 2014


The City watchdog is making changes to ‘guaranteed asset protection’ (GAP) insurance to ensure that consumers buying a new car get a better deal.


GAP insurance is typically sold to buyers of new cars who purchase alongside standard car insurance. If the car is stolen or written off, GAP insurance will cover the difference between the value of the car – which will be covered by standard car insurance – and the amount paid for the car.


New cars lose value very quickly and as a result comprehensive car cover may not be enough to recoup the total amount, so GAP insurance – a market worth £160 million – bridges the difference.


The Financial Conduct Authority (FCA) is proposing a number of change to the industry in order to boost competition. It plans to limit the point of sale advantages for GAP sales made on the vehicle showroom floor so consumers have a chance to shop around rather than purchase the insurance from the car dealer.


The changes follow a review of GAP insurance in which the FCA found consumers were often buying it without thinking about whether they needed it or shopping around, meaning they were not always getting the best deal.


Christopher Woolard, director of policy, risk and research at the FCA, said: ‘Earlier this year we said that firms must put consumers’ interests first. It’s important that people are able to make informed decisions about whether they need GAP, and if they do, the best place to buy it.


‘Today’s proposed rules are intended to help consumers from paying too much for a product that may not be offering good value for money.’


Under the changes, consumers will be given a ‘deferred opt-in or pause’ in the sale so the sales process can be started but not concluded for a set time period. This means consumers will be able to consider whether they need the insurance and have a chance to shop around.


There will also be a requirement for add-on GAP distributors to provide information to encourage consumers to shop around, including telling them they can purchase the product elsewhere.


The regulator’s research found GAP insurance claims ratios from 2008 to 2012 were just 10%, meaning only £10 in every £100 paid in premiums was actually paid out in claims.


GAP add-on sales also account for an estimated annual overpayment of £76 million for every £108 million paid in premiums, indicating that GAP insurance is offering poor value for money.


The FCA has previously criticised GAP sellers of being in a strong position with little competition so they do not reduce the price, of failing to provide enough information to consumers, and said that consumers are often unaware that the insurance can be bought elsewhere.





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