Watchdog wants to encourage people to shop around before signing up.
The Financial Conduct Authority (FCA) has called for a cooling-off period for motorists that choose to buy add-on Guaranteed Asset Protection (GAP) at the same time as purchasing a vehicle.
The watchdog is hoping this will encourage people to shop around to find a better deal, making the market more competitive.
What is GAP insurance?
GAP insurance covers the shortfall which occurs if a vehicle is written off or stolen and the settlement from the insurance payout is not enough to cover the cost of replacing the vehicle or any outstanding finance owed on it.
Most comprehensive motor insurance policies will only pay the current market value of a vehicle, not what it cost to buy originally, so with depreciation some new vehicle owners could be left substantially out of pocket.
The problem with GAP
This type of insurance is usually flogged at the point of sale for a vehicle as an add-on.
The FCA found that shoppers were often purchasing this insurance without any prior knowledge of what the cover is and without comparing prices. As a result, they did not always get the best deal compared to a standalone policy.
In its market study the regulator found add-on three-year GAP policies generally sell for £300, compared with £150 for standalone sales of similar policies.
What's more the regulator said the market claims ratios for GAP (the proportion of the retail price paid out to settle claims) indicated people weren't getting value for money.
The claims ratios for GAP cover between 2008 and 2012 was just 10%, which means only £10 was paid out in claims for every £100 paid in premiums.
In comparison the average claims ratio for general insurance products is 64%.
The regulator said it had found “significant overpayment and poor value for add-on GAP insurance", estimating those that bought the cover overpaid £76 million for every £108 million in premiums each year.
Recommendations
The FCA is proposing a ‘pause in sale’ or deferred period after which a salesperson can start the GAP sale process but can’t conclude it for a set period of four days. It hopes this will give people time to consider if they need the product at all and shop around if they decide they do.
The regulator is also calling for a requirement for GAP add-on distributors to provide information that will encourage people to shop around, such as telling buyers they can purchase the product elsewhere.
The proposals follow on from the FCA’s wider crackdown on insurance add-ons outlined in March earlier this year.
Christopher Woolard, director of policy, risk and research at the FCA, said: "It’s important that people are able to make informed decisions about whether they need GAP, and if they do, the best place to buy it. Today’s proposed rules are intended to help consumers from paying too much for a product that may not be offering good value for money."
Next steps
The FCA is asking for feedback on its GAP proposals by 13th March 2015, with a view to have the new rules come into force by September 2015.