Executive View: Gaining ground with GAP insurance

It’s a year since the FCA’s investigation into GAP insurance, casting light on the character of the motor finance industry. But GAP is back on the table and motor retailers can make strides to re-build revenue, writes Duncan McClure Fisher.

A year on, and the motor finance industry is beginning to bounce back after last year’s Guaranteed Asset Protection (GAP) Insurance Financial Conduct Authority (FCA) investigation. The pause on sales of GAP left both businesses and consumers in a difficult position. Motor insurance companies, brokers and dealers lost vital revenue streams when the FCA froze sales of GAP products.

This included Intelligent Motoring, which also felt the pinch when it stopped selling GAP insurance direct to consumers via MotorEasy and through third-party providers. Meanwhile, consumers were left without a product designed to give peace of mind in the event of a total loss.

As the FCA allows providers back into the market, how can motor dealerships press forward? Despite GAP Insurance now back firmly on the customer propositions table for retailers, Intelligent Motoring estimates that 90% of dealers are not taking advantage of the customer loyalty and value-add opportunities it brings. Has the FCA investigation left motor retailers with cold feet?

At the outset, the FCA announced that multiple insurance firms, representing around 80% of the market, would need to pause GAP sales. Its investigation then revealed some interesting figures.

According to the FCA's analysis, only 6% of the premiums paid by customers for GAP Insurance, were returned in claims, with some firms allocating up to 70% of premium income to commissions for parties involved in selling GAP policies.

It was these headline figures that prompted the alarm to be raised by the FCA, whose principle is to ‘act to deliver good outcomes to retail customers’ under Consumer Duty.

In Defence

Rightly, the industry sought to defend itself, questioning the FCA’s data, saying that using one year’s data was not a fair representation of the GAP market and the post-Covid era meant minimal depreciation of vehicles, skewing the figures unfairly.

Some argued that the GAP Insurance providers were treated harshly, to  provide an example to all financial providers, of the power the FCA has in its investigative arsenal.

Either way, the entire furore left customers and dealerships looking for alternatives. While GAP sales were paused, adept dealerships offered alternative financial products that provide similar protection to GAP insurance, but with improved value propositions.

Meanwhile, others filled their gaping revenue stream with branded insurance solutions to help protect their customers, including cosmetic insurance, tyre insurance, battery insurance and insured breakdown recovery.

There’s no doubt that the FCA’s GAP Insurance investigation dealt some substantial repercussions. The consequences of the probe, however, ultimately forced the motor retail industry to demonstrate a considerable and impressive agility to survive.

It also resulted in revised sales practices, enhanced transparency in commission disclosures, and ultimately ensured that the financial products offered by motor retailers now provide even better value to consumers.

Meanwhile, it showcased how, when put under the cosh, astute motor retailers will move mountains to find the right solutions for their customers.

Fresh Demand

Thankfully, careful pricing, effective compliance measures, and efficient integration into the sales process, means that many providers are now successfully implementing a GAP insurance programme into their sales once more.

Indeed, Intelligent Motoring was one of the first and like others, we found that there was fresh demand from consumers for GAP insurance, some claiming they had been  holding out on their next vehicle purchase until it was available again. 

And the financial peace of mind that GAP brings has quickly been recognised by consumers, with a return to increased payouts as vehicle values normalised post-Covid and residuals began falling on electric vehicles.  It’s not uncommon for claim payouts today to exceed £20,000 or even £30,000.

Yet, with just 10 % of dealers promoting GAP to their customers, many are still missing out. Of course, some insurers have increased net rates while capping the retail premium that dealers can charge, making the proposition less attractive.

Nevertheless, motor retailers who display the agility they demonstrated when the FCA investigation first hit the market a year ago, can easily find lucrative solutions. Providers are out there who will offer flexible options on commissions or margin settings, while offering fair value products to engender customer loyalty.

The GAP Insurance controversy highlighted the need for greater transparency, compliance, and customer-centric sales practices. Consumers deserved a positive outcome of the FCA investigation and they rightly received one.

And whilst it was a hard time for many of us, as the motor retail industry moves forward, it finds itself in an even better place to help protect the financial interests of dealers, promoting financial resilience, while providing the financial safety net that consumers want and need.

Duncan McClure Fisher is CEO at Intelligent Motoring