GAP insurance – fair value?

Last week, the FCA (Financial Conduct Authority) published its data on general insurance value measures for the whole of 2022 regarding how GAP insurance* is sold and the commissions involved. The data revealed some concerning facts about fair value in the market.

Somewhat worryingly, the FCA’s data showed that only 6.6% of the premiums paid by customers for GAP insurance are being spent on claims. Some companies reported paying commissions as high as 70%, which begs the question of how much customers get for their premiums after these commissions are paid during the acquisition process.

The data was published alongside a ‘Dear CEO’ letter, listing the problems in the market. It’s clear that 2024 will be another busy one with even greater scrutiny.

Firms have been told to review and reconsider their policy processes and templates, particularly in these areas:

• Discriminatory pricing practices
• Undervaluation of motor insurance claims
• Failure to implement general insurance pricing practices
• Inadequate practices for identifying vulnerable customers
• Poor business interruption claims handling, and
• Instances of ‘friction’ barriers, including very long waiting times and settlement delays

The message is simple: insurance companies must work together with their service providers to ensure all their customers, regardless of their profile or need, receive good outcomes.

In addition, the FCA has given insurance companies offering GAP products from receipt of the letter a three-month deadline, effectively by the end of 2023 to improve the value of their products and services and will take further action against firms that do not do so. Firms are reminded that fair value is more than just price. Firms must also consider the quality and benefits of a product or service when validating the principles of fair value. Firms should already meet the obligations laid down under PROD4 and Consumer Duty regarding regular monitoring and evaluation of the value of products or services they provide.

Nevertheless, the FCA has raised concerns about the overall extent and quality of insurance firms’ implementation and application of these provisions based on the results from the data. The FCA also suspects that certain firms may have misunderstood the reporting requirements and misinterpreted the difference between add-on and stand-alone products. The data indicated that some add-on products have a substantially lower proportion of the premiums reimbursed as claims than corresponding stand-alone products. The FCA has indicated that it will deal with firms before carrying out any further data collection to provide clarifications on such issues.

If you have received a specific request from the FCA in respect of Fair Value – we understand that deadlines are tight for responding. GreenKite can help you. In the first instance, please contact [email protected]

*GAP insurance, which stands for Guaranteed Asset Protection insurance, is a type of insurance coverage designed to protect individuals who are financing or leasing a vehicle. It is typically offered in addition to standard auto insurance and serves as a specific purpose.