Gap insurance not offering 'fair value' to car owners

Gap insurance – short for guaranteed asset protection – is usually sold as an add-on to car insurance or can be bought as a standalone policy, but car owners might want to think twice about taking it out.

The Financial Conduct Authority (FCA) has found payouts as a proportion of what firms take in premiums indicate that the products may be failing to provide fair value to customers.

Which? takes a closer look at the FCA's findings and explains what to do if you believe your insurance policy doesn't offer value for money.

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Gap insurers not giving 'fair value'

Gap insurance is meant to cover the difference that can occur between the price you paid for your new vehicle and the amount your insurer is willing to pay for it should it get stolen, or written off, soon after buying it. 

However, only 6% of the amount Gap insurance customers pay in premiums is given out in claims, according to the FCA's latest Value Measures Data report. 

The data, which covers January to December 2022, shows firms in the distribution chain – such as motor dealerships – were being paid up to 70% of the value of insurance premiums in commission by providers.

Other types of insurance appear to offer better value for money. The report – which covers a full 12-month period for the first time – found that the amount paid out in claims was 65% of the price of premiums for car insurance, 50% for home insurance (buildings and contents combined) and 32% for travel insurance.

• Find out more: Gap insurance explained.

Providers warned to up their game

The FCA has now written to providers offering Gap insurance, giving them three months to prove that customers are getting a fair deal. It has also sent letters to all insurance firms, warning them to check their products meet the standards expected by them under the new Consumer Duty rules. 

These new practices, launched by the FCA on 31 July 2023, are designed to raise the standards of how financial firms treat customers. Matt Brewis, director of insurance at the FCA, says that their response to findings in the Value Measures Data report is an 'early signal of the work we’ll be doing under the Consumer Duty'.

He added: 'Customers should be reassured that we’re in their corner and are taking action where we see poor value being provided. If the firms are unable to prove they’re providing fair value to their customers, they should expect further action from the regulator.'

• Find out more: what is the new Consumer Duty?

'Concerns about value raised a decade ago'

Rocio Concha, Which? director of policy and advocacy, said:  'At a time when many insurance customers are paying sky-high premiums amid the worst cost of living crisis in decades, these figures clearly demonstrate that parts of the market aren't providing value for money for consumers. 

'It's very concerning to see that payouts for Guaranteed asset protection are sitting at 6% of what these firms take in premiums, despite the regulator raising concerns about value for money almost a decade ago. 

'The FCA has left firms in no doubt over their obligations to their customers, and failure to meet deadlines set for improvements must result in immediate action by the regulator.'

Don't think your deal is fair? You can complain

If think a firm isn’t following the Consumer Duty, the first step is to take your complaint to the provider.

You’ll need to give the business a chance to respond, but if it takes longer than eight weeks, or the company rejects your complaint, you should ask for a 'final response'. If there's still no joy after a couple of weeks, then you can request that the Financial Ombudsman Service (FOS) investigates.

Making a complaint to the FOS is pretty simple – just visit the ombudsman's website and fill in a short online form, including as much evidence as you can.

After considering all the evidence, the FOS will write to you and the company with the decision and if there is to be an 'award'. If your complaint is upheld, then this letter will include details of what the company must do to put things right.

• Find out more: how to take a complaint to the Financial Ombudsman Service.

Shop around for the best deal

Unlike normal car insurance, which you purchase annually each year, Gap insurance cover can last for as long as five years. But it usually needs to be bought within the first year of owning your car, even if you defer the cover so it only kicks in from year two.

As with standard car insurance, you can compare Gap insurance policies online to find the cheapest deal for you.

Whatever policy you choose, always read the small print and check elements such as the length of the policy, excess and any significant exclusions.

Our cost comparison figures show how much you can save by shopping around.

• Find out more: best car insurance companies.

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