The Financial Conduct Authority (FCA) has sent letters to insurance firms issuing a warning about how they must take more action to ensure fairness with their customers.
The FCA reminded them that they are expected to ensure that their products are providing fair value to their customers and provided evidence that some Guaranteed Asset Protection (GAP) products may not be giving their customers a fair deal.
GAP insurance is an add-on to motor insurance that typically covers a financial shortfall that can happen when a customer’s vehicle is either written off or stolen, or if the pay-out for motor insurance does not pay back its original value when it was purchased or offers the remaining finance value if it was bought on finance.
The FCA’s latest insurance value measures data from Jan-Dec 2022 showed that there were potential concerns when it comes to the value of GAP products to customers. Only 6% of the amount of what customers pay in premiums are paid out in claims, it suggested.
Some firms were paying out up to 70% of the value of insurance premiums in commission to parties who are part of the distribution chain, like motor dealerships.
The regulator warned the firms that immediate action must be taken to prove that they are giving their customers a fair deal or else it will intervene after an ultimatum of three months.
“If the firms are unable to prove they’re providing fair value to their customers, they should expect further action from the regulator,” said Matt Brewis, director of insurance, FCA.
“Customers should be reassured that we’re in their corner and are taking action where we see poor value being provided,” he added.
James Daley, managing director at Fairer Finance, a research and ratings agency, expressed his support of the FCA’s warning to motor insurers.
“It’s encouraging to see the FCA already starting to use the Consumer Duty to challenge insurers about the value they are offering,” said Daley.
“If an insurer is only paying claims worth around 6% of premiums, then it’s clearly not offering fair value to its customers. GAP insurance is usually sold by car dealers - at a time when the customer is already navigating a very large purchase, and is unlikely to have the opportunity to shop around,” he explained further.
“Let’s hope the FCA builds on this momentum and starts to shine a light on other sectors - as GAP insurance is by no means the only insurance sector where poor value is being offered to consumers.”
In 2021, rules requiring insurers to make sure that their products providedfair value to their customers were introduced. They were required to submit regular Value Measures Data to the FCA.
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