After the Financial Conduct Authority (FCA) instructed many motor insurers to pause selling motor GAP insurance due to concerns that providers weren’t providing fair value to consumers earlier this month, 80% of firms retracted their policies from the market.
Last year, the FCA revealed in letters sent to all insurance firms that they had identified evidence that some GAP insurance products were failing to provide fair value to their customers and were therefore in breach of consumer duty.
For the most part, the sale of GAP insurance is still on pause, with many brokers unsure when they’ll be able to resume sales, if ever (Our Motor Gap product is still live on our Flightdeck platform and on our consumer site Save More Money).
Unsurprisingly, this significant market shake-up leaves the industry grappling with questions, including what will be the long-term impact on brokers, and will GAP insurance be banned for good?
Why aren’t current GAP products considered fair value?
Last summer, the FCA’s new 12th principle of their ‘Principles for Business’ (Consumer Duty), came into effect.
The move towards Consumer Duty has meant that both the FCA and financial firms are required to change the way they act if they’re not already offering the highest level of value and transparency.
Recent fair value data from the FCA has shown that in some cases, only 6% of the amount customers paid in premiums was paid out in GAP insurance claims (The FCA, 2024). Furthermore, the same data also highlighted that, in some cases, 70% of the price paid by consumers in motor GAP insurance premiums went to commission for parties in the distribution chain (for example, motor dealerships.)
After learning this information, it came to the FCA’s attention that the way motor GAP insurance was being sold wasn’t compliant with consumer duty, nor was it in line with the desired customer-centric way of selling financial products.
As a result, the only option was to urge insurers to reassess their policies.
Will GAP insurance be banned?
Since the pause on motor GAP insurance sales, one key concern has been whether the product will be banned entirely.
Fortunately, providing organisations make the necessary changes to their motor GAP policies and adhere to consumer duty, it looks like motor GAP insurance will remain on the market, at least for now. The authority told Auto Retail Agenda, “We have no intention of banning GAP insurance as a product line.”
However, the FCA did also impress that it will act, if necessary, stating, “We have told firms to take immediate action to show how customers are getting a fair deal, or we will intervene…If the firms are unable to prove they’re providing fair value to their customers, they should expect further action from the regulator.”
What does this mean for motor insurance brokers?
Since the Financial Conduct Authority enforced consumer duty last year, the industry has experienced a paradigm shift. This shift moves away from seller-centric sales models towards more customer-centric frameworks. For motor insurance brokers, this transition has required a focus on prioritising value, transparency and fairness to ensure the new model’s success and allow their businesses to flourish in the competitive marketplace. Adapting to this change means the industry needs to overhaul its underwriting criteria and risk assessment models to better align with the evolving market conditions and regulatory expectations.
Implementing these changes might pose challenges for our industry, but the potential rewards are substantial. By prioritising customer interests, we can tap into a larger customer base, particularly as many UK drivers currently forgo optional add-ons like motor GAP insurance due to a perceived lack of value or understanding. Enhancing the perceived value and transparency of these products could significantly increase uptake. Furthermore, there’s a strong potential for improved customer loyalty as consumers begin to recognise and appreciate the improved standards and greater value for their money that come with these changes.
The move towards a more customer-centric approach also opens opportunities for insurers and brokers to innovate and differentiate themselves in the market. By developing new products and services that more closely match consumer needs and preferences and by communicating the benefits of these offerings more effectively, we can not only meet the regulatory requirements but exceed customer expectations too.
However, achieving this requires considerable innovation and flexibility from brokers. We must be willing to reevaluate and possibly reinvent their product portfolios, marketing strategies and customer service practices. This might include investing in technology to improve customer interactions, training staff to better understand and communicate the value of insurance products and working closely with insurers to develop more customisable and responsive insurance solutions.
In essence, embracing the principles of value, transparency and fairness mandated by the FCA’s consumer duty can serve as a catalyst for positive change within the insurance industry. While it necessitates a shift in mindset and operations for brokers, the potential for building stronger, more loyal customer relationships and tapping into previously underserved segments of the market can lead to lasting benefits for both consumers and the industry as a whole.
