What does the suspension of GAP sales tell us about fair value?
The agreement to pause sales of Guaranteed Asset Protection (GAP) insurance for 80% of the market was a big headline in February. It may have come as a shock to some but the FCA’s concerns with GAP insurance are nothing new, dating back to its 2014 Market Study. The FCA pointed to its 2022 value measures data and had given GAP firms a stark warning in September 2023 over fair value.
The key point is that firms should pay close attention to FCA publications, in particular specific letters or warnings, since these will signal likely areas of intervention in response to the Consumer Duty. Has the FCA mentioned your product or sector? Where there is evidence of poor value, the FCA is keen to take action to impose the Consumer Duty and call out poor outcomes for customers.
These are the factors that stand out:
Commission
70% of premiums being paid in commission is high even if your Fair Value Assessment (FVA) tells you that the price customers pay is fair. It is unlikely that such a high commission percentage could be justified e.g. by reference to sales volumes or the overall price. Where the distributor has any discretion over the commission charged, this needs to be closely monitored and contractual limitations imposed.
Distribution arrangements
Sales by unregulated introducers need to be overseen and monitored. The product itself is still regulated and distribution arrangements play a key part in the value equation.
Terms
Products that give coverage in very limited or specific scenarios need to be carefully communicated and sold to customers.
Claims
A claims ratio of 6% is low.
A high claims acceptance rate (95%) does not necessarily mean that a product provides fair value. There are other important factors to consider, such as complaints, claim pay-outs and handling timeframes, and this kind of positive indicator should not be used in a way that outweighs or detracts from negative indicators of value.
Implications for the wider motor market
The intervention in GAP should come as a warning to the wider motor market, bearing in mind the FCA’s work in motor finance. There have been two major regulatory interventions in a matter of weeks relating to FS products adjacent to the motor sector. The FCA also called out excess protection (as a motor add-on) in its value measures data.
Adding fuel to the fire, BBC Verify found that car insurance quotes were a third more expensive in some areas of England with the biggest minority ethnicity populations [1]. The FCA said that it was looking into the concerns.
Next steps
As well as the pressure to demonstrate that their products can offer fair value, dealing with GAP products could be challenging for firms that are completing their first Consumer Duty annual board assessment (due in July).
The FCA will do an additional assessment of the GAP market so this won’t be the last we hear about the value of GAP insurance.
Get in touch
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[1] https://www.bbc.co.uk/news/business-68349396
Key contacts
Jessie Jones Director - Regulatory Compliance
