Some GAP Insurance providers have agreed to “pause” sales of their products following a request from the Financial Conduct Authority. This came about after the FCA had written to insurance providers warning them it might ‘intervene’ in the market, asking them to voluntarily withdraw their products from sale. As the FCA confirmed this they also revealed some 80% of the market has agreed to suspend the sale of Gap insurance products.
This then led to some insurance providers claiming the FCA could be ‘inadvertently putting consumers in vulnerable positions’ as a result of the action. They are worried with no cover available to car buyers, they could be left out of pocket in the event of an accident.
Now the FCA has asked all GAP insurance providers to pause sales.
Which begs the question – what exactly is GAP insurance and why is it valuable to customers buying cars?
GAP stands for Guaranteed Asset Protection. If you’ve bought a car, a GAP insurance policy might (and that’s the big word here) cover the loss in value if your vehicle is written off. For example, if you bought a car for £33k and it’s written off for £20k, you might get the difference back via your GAP insurance. GAP insurance therefore helps to bridge the payment gap between the settlement amount from your comprehensive motor insurance policy and the original purchase price of your car.
Issues occur when things like your main insurer doesn’t pay out. This in turn invalidates the GAP claim. Or there’s no GAP to fill. Most GAP policies require you to be fully comprehensively insured, so if you aren’t you won’t get paid.
The FCA’s main concern and area of further investigation appears to be in line with its latest fair value measures data, which shows that only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims.
The FCA has stated it’s seen examples of some firms paying out 70% of the value of insurance premiums in commission to parties involved in selling GAP policies. This is pretty fundamental as it essentially challenges product design and the way it’s sold.
This is an interesting product for insurance. It acts more like a warranty to price, combined with its interdependency to a core insurance product. Whether that’s paying out or not it is relatively unique. Add-ons like breakdown cover or courtesy car typically act relatively independently and in the case of courtesy car, it’s typically activated within the insurance claims process. Perhaps an intrinsically fairer proposition and experience.
The FCA’s commitment to fairness
This is a strong demonstration of the FCA’s commitment to fair value, and also collaboration with the industry. The action at this stage has been to challenge the insurers as opposed to coming in full steam and heavy-handed. The voluntary reaction from insurers, however, is both interesting and somewhat alarming. If we agree there’s some validity in the potential benefits of GAP insurance, simply hitting pause could leave people high and dry. So let’s hope they resolve this conclusively and quickly – whichever direction that takes.
What next from the FCA?
I don’t think this is a sign that the FCA is specifically targeting the more niche offerings, as some observers have suggested. It’s a sign they are looking at the underlying data and acting on it. So where we see unfair ratios, claims data, customer dissatisfaction, and so on, we could well see something similar from them again.
I think this is important in these next phases of the evolution of consumer duty and other areas of regulation. There’s complexity in being definitive about what constitutes fair, but I largely agree that the “data” will allow this picture to form.
What should insurers do now?
While accepting regulation is a necessary burden for creating & maintaining a fair and competitive market for financial services, this latest move seems like a huge opportunity and not in the slightest an obligation.
In summary, the Consumer Duty asks that financial services companies:
1. To communicate clearly to ensure consumers understand what they’re buying
2. To deliver good outcomes, and to prove they’ve tried to meet the needs and particular characteristics of those customers.
3. To provide retail customers with products and services that meet their needs and offer fair value. To support them when they need it, while also addressing vulnerable customers, making sure no one gets left out.
Many have asked, “Why do we need this standard at all. Surely it should be a basic standard insurers are already obliged to meet?” These are very good questions. The reality is that banks and insurers are predominantly built around product structures, i.e. a policy, or a current account, and not around the customer.
In my opinion, building product-centric businesses has been a double-edged sword of limitation. It makes it incredibly hard to act like the data-fluid and intelligent ecosystems we see in other industries. It means that at some point, all of us have experienced a lack of clarity when buying a product, frustration with rekeying data or discovered other products that meet our needs.
The opportunity this provides is to form meaningful relationships with customers, openly asking financial services and insurance businesses to use data to ensure great communication, embrace open banking & finance and ensure customers aren’t caught out in their ever-changing lives. Moving from transactional to relational businesses should be better for everyone.
Businesses under the Consumer Duty should see this as a chance to transform from product to customer-centric businesses. Reap the benefits of forming meaningful relationships with customers. By providing products & services into the context of people’s lives, and supporting each of them by ensuring they’re clear on their choices and what’s available as their lives inevitably change. And making this highly integrative allows endless partnerships to bring more value to those customers.
Insurance needs to play a key role in the continued support of humanity, and the progress that comes from this. The key is customer-centric business models and similarly technology ecosystems, that create far more adaptive and resilient businesses. This is an emerging regulated duty to act fair, better address vulnerable customers and adaptivity in response to economic and environmental change. So this is no longer a choice but a competitive requirement. Insurers need to ask themselves a critical question about the sort of ecosystem business model they want to create.
About the author
Rory Yates has more than 24 years of business leadership experience spanning client, agency, consultancy, start-up, and private equity roles. As EIS’ Chief Strategy Officer, Rory helps insurers achieve their transformation goals and evolve toward ecosystem-based futures via insurance core systems transformation, including truly personalised engagement, taking innovation from concept to market quickly, and growing efficiently.
