Almost unnoticed in the consumer automotive world, a major change to GAP insurance has taken place overnight that affects almost every car dealer in the country. Why do car buyers need to know about this? Read on.
GAP insurance is a popular product that car buyers can purchase in addition to their regular comprehensive car insurance. We have a whole GAP insurance hub here at The Car Expert that explains it in more detail, so we won’t go into it again here. But the way that you can buy GAP is now changing.
The Financial Conduct Authority (FCA) has been investigating GAP insurance for many months, as a result of unfair sales tactics and overinflated prices charged by car dealers. As a result of this investigation, almost every car dealer in the country has had to stop selling GAP insurance as of today (7 February 2024).
The target of the investigation was car dealers, but the impact of the investigation has also affected online GAP providers, which wasn’t the intention at all.
We spoke to a number of GAP insurance providers today to find out whether they are still able to sell policies, and what they expect to happen in coming weeks.
Need a GAP refresher? Start here:
What is GAP insurance and should you have it?
Has GAP insurance been banned?
No. There have been reports in the trade media that GAP insurance has been ‘banned’, but this is not true. However, it is being withdrawn (at least temporarily) by the vast majority of car dealers, which in turn make up the vast majority of GAP sales.
The FCA is adamant that it has no intention of banning GAP insurance as a product, but it is very unhappy at how that product has been sold by car dealers and their insurance underwriters. As a result, the FCA has told several insurance underwriters to stop selling GAP insurance until they can show significant improvements in how it is provided.
The insurance companies affected by this underwrite almost every GAP policy sold by car dealerships across the UK – regardless of the brand name on the policy. As such, car dealers have not been able to sell GAP insurance through these insurers as of today.
GAP insurance providers and brokers who do not use these underwriters are not currently affected, and may continue selling GAP insurance as normal. This applies to some (but not all) online GAP insurance companies. Again, it comes down to the insurance company that ultimately underwrites the policies. Some online GAP providers use the same underwriters as dealers, and have therefore been forced to stop selling GAP for the time being.
Why have dealers stopped selling GAP insurance?
In short, because they’ve been taking the mickey for many years.
In more detail, the FCA is unhappy that car dealers (and their insurance underwriters) have been charging eye-watering prices for GAP insurance policies, combined with hard-sell tactics to intimidate customers into buying a product they didn’t really understand, need or want.
Car dealers have traditionally made huge commissions from selling GAP insurance – literally hundreds of pounds per policy, which was often more than they would make from selling the car itself. That’s why they always pushed it so hard.
Back in 2015, the FCA introduced rules to stop car dealers selling GAP on the spot – they had to provide relevant information to the customer and then observe a two-day waiting period before they could proceed with a GAP sale. This was imposed so that customers could take the information away and do their own research before making a decision. However, the regulator clearly feels that this didn’t go far enough in addressing its concerns.
In theory, dealers will be able to resume selling GAP policies once their insurance providers have demonstrated to the FCA that it’s being done appropriately. In reality, however, that means dealers will be getting far less commission, so most of them are unlikely to bother. If they can only earn £30 instead of £300+ from selling a GAP policy, they’ll simply try to flog you something else instead…
What did the FCA say?
Basically, the FCA called out car dealers and insurers for fleecing customers. It was particularly concerned that commissions were as high as 70% of the policy cost, and overall payouts from insurers amounted to only 6% of all GAP income they received.
The regulator wrote to insurers in September last year, warning that “more action must be taken to ensure good consumer outcomes”. It went on to say: “The FCA has told firms manufacturing GAP insurance products they must take immediate action to prove customers are getting a fair deal, or it will intervene – giving firms a three-month ultimatum.”
That ultimatum expired over Christmas, and the FCA was unhappy with submissions made by insurers that they were addressing the high prices and low payouts associated with dealer-sold GAP policies, arguing that they do not represent ‘fair value’ to customers.
The FCA made clear to insurers that if they could not prove that they were providing fair value to customers, they could expect action to be taken. And that is what’s been happening over the last few weeks, with several insurers asked (which really means ‘instructed’) to withdraw their GAP offerings.
Where can I buy GAP insurance in 2024?
As a generalisation, dealers won’t be selling GAP insurance for the foreseeable future, but online providers should be able to continue. However, it’s not currently that simple.
The FCA’s actions are very much targeting car dealers, who are the brokers for the vast majority – about three quarters – of all GAP insurance products sold. In recent weeks, the FCA has asked several insurance underwriters to voluntarily withdraw their GAP offerings no later than 6 February. This covered pretty much every insurer (as far as we’re aware) providing GAP policies to car dealers in the UK.
It wasn’t the FCA’s intention (apparently) to stop online GAP providers from selling policies, because those products are far more reasonably priced and the market is much more competitive. Research over the years has shown that online sellers can generally provide the same level of cover for 60-75% less than charged by car dealers – and in many cases, underwritten by the very same insurance company.
Some online providers have been stopped from selling GAP insurance
Although some online GAP providers are still able to trade normally, others have been caught up in the FCA’s intervention because they use one or more of the same underwriters who service car dealers. As such, some of those providers have been forced to stop offering GAP policies as of today until either they can find a new underwriter or the FCA clears their current provider.
Even for those companies who are still trading, there has been considerable confusion. We’ve been speaking to several providers over the last few days, and some of them were told on Monday (5 February) that they would have to stop offering policies on Tuesday with just 24 hours’ notice. That order was then rescinded the following day, just hours before the midnight deadline, after they’d already started removing information from their websites and cancelling advertising spending, so they’ve then had to put everything back again.
It appears that while the FCA’s intentions were well-meaning, the implementation has been carried out poorly – the phrase “throwing the baby out with the bathwater” has come up many times in our conversations with GAP providers this week.
Some of these companies are specialist GAP providers who do nothing else, and they are currently unable to trade – even though they were not the target of the FCA action and are not supposed to be affected. One managing director who spoke to The Car Expert today said that he had supported the FCA’s intentions back in September, but it could now wipe out his business if it’s not resolved.
Hopefully, the mess that the FCA has created for those online providers will be sorted soon. For others, it’s business as usual – albeit after a lot of confusion over the last few weeks.
Is GAP insurance still worthwhile in 2024?
There are various different flavours of GAP insurance, and they’re all perfectly valid products as long as you’re buying the right product to suit your needs – and as long as you’re paying a reasonable price.
GAP is like any other insurance product. You’re paying an amount of money to cover the risk of losing a much larger amount of money. Chances are that you’ll never need to make a claim, so you have to weigh up whether the cost of the policy is worth the risk.
One of the big benefits of most GAP policies is that they cover finance shortfall. Almost all private customers buying new cars (and most customers buying near-new cars) will finance them on a PCP agreement. That’s important because you could be financially exposed if your car is stolen or written off.
Most customers with a PCP will spend most of their agreement with what’s called negative equity – that means you owe the car finance company more than what the car’s worth. So if your car is written off and the insurance company gives you a cheque, it might not be enough to pay off your finance. So you’ll still owe the finance company money, even though you no longer have the car. Most GAP insurance policies will cover your finance shortfall (it’s called Finance GAP).
The golden rule is to shop around to decide which policy, and provider, is best for you. Or maybe to decide that you don’t need it at all. If you do want to buy a GAP insurance policy in 2024, our regularly updated list of best providers is the best place to start:
