More uncertainty for GAP providers: managing the challenges and finding opportunities in the warranty market

Coming off the December 2022 warning to the motor market about undervaluing vehicles, the FCA released long-awaited findings from their “multi-firm review into insurers’ valuation of vehicles” on 27 April. Although the review was conducted before the Consumer Duty came into force, the FCA highlighted several failings that would or may conflict with the new standards of the Duty.

The message is clear: if you continue those poor practices, they are inconsistent with the Duty, and you are not providing good outcomes for retail customers.

Key findings

The review found that some firms knowingly offered below-market value for vehicles, expecting customers to negotiate. Additionally, inconsistent valuation methods often resulted in lower claims payments than those listed in guides.

However, this issue affects more than just primary motor insurers. Over the years, new business models have been built based on existing valuation practices. The FCA specifically called out claims handling outsourcers with conflicts of interest due to their vehicle salvage operations. The Guaranteed Asset Protection (GAP) market could be even more profoundly affected.

Since the end of 2023 and the publication of the 2022 GI value measures data, the FCA has focused heavily on the GAP market, identifying poor payout ratios compared to the prices customers pay, as well as high commissions and distribution costs. Combined with macroeconomic events like COVID-19 and the war in Ukraine, GAP products have offered poor consumer value.

Regulatory attention and market volatility

Due to this scrutiny, many firms have withdrawn their GAP products from dealerships and online sales. This pause will continue until the market can demonstrate fair value for consumers, which could be up to five years for a GAP policy.

Significant market volatility, as seen in recent years, means that changes in primary motor insurers’ behaviour could be the next macroeconomic event that GAP providers must address in their fair value assessments. If primary motor providers increase vehicle payouts, this would reduce the required payouts from GAP providers, decreasing the fair value for consumers.

Interestingly, it is the potential for increased payouts by primary insurers to cause market inflation that might be most troubling to GAP underwriting functions. With the GAP value calculation affected by every move in the second-hand market, SMF23 (CUOs) have a great deal to consider in deciding whether their GAP products provide fair value and will continue to do so over the foreseeable future (which should be the life of the product).

How we can help

Despite these challenges, GreenKite is closely monitoring the warranty market and offers strategic advice, tools, and expertise on the GAP and warranty markets. Please do reach out to us about your GAP or warranty books, and we hope to provide some good news for your warranty business. You can email us at [email protected] or call us at +44 (0) 203 576 1868.