Are YOU paying for Gap car insurance you don’t need? FCA to probe whether deals are worth it
Are you paying for Gap car insurance that you don’t need? FCA will investigate whether deals are worthwhile
- Gap insurance covers the depreciation of your car if it is written off or stolen
- But the deals are almost never claimed, with commission levels of up to 70%
- Now the regulator is examining the market to check whether Gap deals are worth it
Motorists with Gap insurance only make claims once every 300 years – and now the financial regulator is stepping in to ensure consumers aren’t ripped off.
Not only is the Financial Conduct Authority (FCA) concerned that Gap policies are barely being claimed, it is now also asking serious questions about commissions of up to 70 percent increasing premiums – for no apparent reason.
GAP stands for Guaranteed Asset Protection and is a type of insurance that covers the loss of value of your car if it is written off or stolen because vehicles depreciate so quickly.
It is normally sold as a standalone policy or as an add-on to other types of financial deals, such as car insurance.
Wheeler dealer: Many Gap insurance policies are sold by car dealers in addition to vehicles
There were 567,895 additional Gap policies and 1.8 million standalone deals sold in 2022 – a total of 2.4 million, meaning one in 16 drivers has such a product.
The average Gap premium is around £126 per year for standalone cover and £131 as additional insurance.
But there’s a problem with gap insurance: most drivers never claim it.
New figures from the FCA show that just 0.34 percent of the additional Gap is claimed each year – meaning the average driver makes a claim once every 294 years.
For the standalone Gap, 1.8 percent of people who take out the policy make a claim every year, meaning the average customer makes a claim every 55 years on average.
The FCA says Gap insurers pay out the least on claims in any area of insurance, as a percentage of the premiums they charge.
Standalone Gap policies pay out just 6.87 percent of premiums as claims each year, while add-on Gap deals pay out 4.37 percent.
By comparison: car insurers pay 64.51 percent of the premiums as damage and motorcycle insurers 60.67 percent.
With This is Money unveiled in January, the FCA is turning its attention to low-value insurance contracts.
Piggybacking: Most Gap insurance is sold separately, but about one in three deals is purchased to supplement other insurance policies
The FCA has given Gap insurers a month to explain how their deals are suitable for drivers.
FCA insurance director Matt Brewis said: ‘Customers need to be reassured that we are on their side and will take action if we see little value being offered.
“If the companies cannot prove that they are providing fair value to their customers, they should expect further action from the regulator.”
This is Money understands that the short timeframe of one month reflects how concerned the FCA is about the state of Gap insurance.
Some of the largest insurers issuing Gap policies are AmTrust Europe and Ageas.
The regulator is also concerned about the level of commission charged on Gap insurance. For example, insurers routinely pay car dealers to sell Gap to customers and then reimburse them.
The FCA has examples of companies paying out up to 70 percent of the value of insurance premiums on commission to businesses such as car dealers.
A spokesperson for the Association of British Insurers trade body said: ‘Our members fully understand the importance of providing fair value to customers and work hard to achieve this.
‘We will discuss the FCA’s concerns with them to understand where further action can be taken.’
Why don’t drivers claim Gap insurance?
Some may not be aware that they even have this policy.
When this insurance is sold, especially as an add-on to a larger master policy, customers often don’t realize – or forget – that they have coverage at all.
When gap insurance is applied for, it is almost always paid out, suggesting that many customers are unaware that they are covered at all.
In fact, standalone Gap insurance has the highest payout rate of any insurance policy, at 99.3 percent, with an average claim of £529.86 – when customers actually make a claim.
That drops to 95.59 per cent for add-on Gap, with a typical claim of £2,201.
How do I know if I have gap insurance?
Check the terms of your car insurance policy, as well as any car finance documents you have.
Gap insurance isn’t the only insurance contract on the FCA’s watchlist.
The regulator said: ‘While this action relates to gap insurance, many of the concerns we see may relate to wider issues and therefore company boards should take note of this action and ensure they meet their product governance requirements across all retail products . .’