GAP insurance products have come under specific criticism from the Financial Conduct Authority (FCA) in its initial report on the general insurance add-ons market in the UK.
The regulator announced its intention to investigate the general insurance add-ons market in March and has published its findings and proposed remedies to the perceived errors in the system. The FCA stated in March that it was investigating the industry as part of its competition remit. It was particularly concerned with the effectiveness of competition on the market, the effect on consumer behaviour and the product choice that the sales methods presented to consumers.
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In the preliminary report, the FCA found that the products did indeed affect the behaviour of consumers, with 58% of consumers saying they didn’t consider another policy when purchasing the add-on, compared to 22% when the product was built as a stand-alone product. One in four were even unaware that such products could be bought separately.
In addition, the FCA found that the majority of consumers (69%) were unaware of how much they had paid for the product.
A lack of understanding
The report also found that difficulties customers had in understanding the products and their value could often be increased by the tendency for the products to be sold late in the purchase process of more exciting and valuable products such as cars and holidays.
Specifically the report commented that: "The add-on mechanism has a real impact on consumer behaviour and affects the way people make decisions. There is little pressure on firms to offer good value as add-on buyers are less likely to shop around and are less price sensitive. They have poor awareness of buying products or of the price they paid. "Their attention is on the purchase of the primary product rather than the add-on, leading many consumers to buy add-on products they do not need or understand."
In a statement the FCA did make it clear, however, that the lack of understanding of general insurance products was not just limited to their sale as add-ons, but that consumers were in general not well aware of their use or effectiveness.
GAP is not the only product that is sold as an add-on to consumers at the point of sale. Others include tyre insurance, bodywork insurance and breakdown policies.
During the investigation the FCA found that the combination of findings led to a lack of competition in the market and that when comparing claim ratios (premium payments versus pay-out values) the products were of poor value to consumers. In the case of GAP insurance the FCA found that only around 10% of policies led to a claim.
The FCA estimated that the amount lost to consumers through overpaying could be between £108m and £200m.
A proposed solution
The report concluded with a series of proposals designed to help eliminate the failings of the add-ons market.
The first was to defer the opt-in time for GAP insurance products and to disallow the sale of such products alongside car finance.
Other remedies proposed included the publishing of claims ratios and also the improvement of the offering of add-on products through comparison sites.
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By GlobalDataThe FCA has worked with the Finance & Leasing Association (FLA) and other trade bodies in coming to a conclusion that does not overly affect the industries involved.
Talking to Motor Finance Paul Harrison, head of motor finance at the FLA said: "We are pleased that the FCA has listened to a number of the FLA’s specific concerns – including how the proposed ‘deferred opt-in’ for GAP insurance would work at the point of sale. The FCA has committed to reviewing this further before publishing its consultation paper on remedies later this year."
Despite many dealers not being members of the Society of Motor Manufacturers and Traders, a spokesman for the trade body said: "To avoid any consumer confusion or detriment, we would encourage all dealers and finance providers to be absolutely sure that their products are clear and transparent at the point of sale."
Other commentators have expressed the sentiment that the product remains one that finance companies and dealers should still be involved with, especially after efforts in the industry to address some of the initial concerns of the FCA.
Ciaron Whelan, divisional director of aftermarket warranty provider The Warranty Group said: "Many dealers are now offering a 30-day ‘cooling off’ period for GAP customers. This seems to us to offer a more than ample opportunity for customers to review the product they have bought and, if necessary, change their minds."
He further added: "Our experience, over many years, is that where staff are correctly trained and incentivised, provided with good supporting materials and given easy-to-use systems, GAP sales will increase. There’s no reason to believe this situation will change in the future."
Respondents
Up until 8 April the number of respondents to the findings and subsequent proposals was 65. These came from "a cross-section of stakeholders including regulated firms, trade bodies, a consumer group and individuals."
Of those that answered the call from the FCA, most focused their responses on the proposed changes rather than the initial findings, though in the report the FCA said: "Industry respondents expressed concerns that the claims ratio did not reflect all relevant costs and as such was not a good indicator of value or profitability, and queried some of the detail of our calculations, as well as the comparisons drawn between products."
The FCA is encouraging further industry comment ahead of finalising its proposals at the end of the year.
