The Financial Conduct Authority (FCA) recently asked several insurance firms to pause sales of Guaranteed Asset Protection (GAP) insurance. This was due to concerns that the product wasn’t always offering fair value to customers. As of May 24, 2024, some firms have been allowed to start selling it again after making improvements. These firms represent a significant portion of the GAP market, accounting for 80% of the GAP market. But what exactly is GAP insurance, and do you really need it?
Understanding Guaranteed Asset Protection (GAP) Insurance
At its core, GAP insurance is designed to cover the difference between a vehicle’s purchase price or outstanding finance and its current market value. When a car is declared a total loss – either written off or stolen – your standard motor insurer will pay out the current market value of the vehicle. However, this amount might be less than what you originally paid for the car, or less than what you still owe on a finance agreement, such as a Personal Contract Purchase (PCP). This difference is where GAP insurance steps in. It aims to ensure you don’t face a financial shortfall out of your own pocket.
For example, if your car is worth £15,000 but you owe £18,000 on your finance, your standard insurer might pay £15,000. Without GAP insurance, you would need to find the remaining £3,000 yourself. GAP insurance would cover that £3,000 shortfall. This is particularly relevant because new cars can lose a significant amount of their value quickly. Some estimates suggest new cars can lose up to 40% of their value in the first year, and approximately 15–35% in year one. After three years, many cars are worth only 40–60% of their purchase price.
If I were buying a brand new car on a PCP finance deal with a small deposit, my first move would be to understand the exact depreciation rate of that specific model. This would help me gauge the potential financial risk I’d be taking on if the car were written off early in its life.
Why GAP Insurance Has Faced Scrutiny
The Financial Conduct Authority (FCA) has been looking closely at GAP insurance because they are concerned that it is not always providing fair value to some consumers. One of the key findings from their investigation was that, on average, only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims. This means that for every £100 a customer pays, only £6 is returned to customers through claims. The remaining £94 covers the insurer’s costs, including commissions.
The FCA also noted that some firms were paying out as much as 70% of the value of insurance premiums in commission to parties involved in selling the policies, such as car dealerships. This high commission structure can significantly reduce the amount available for claims, leading to the low claims payout ratio. These findings prompted the FCA to request a pause in sales for many firms and to require changes to the design of GAP insurance across all distribution channels to ensure it meets the requirements of the Consumer Duty, which mandates that firms provide fair value.
If I were considering GAP insurance, I’d want to know the exact claims payout ratio for the specific policy I was looking at, not just the industry average. Understanding this figure is crucial to assessing whether the premium I’m paying is likely to result in a fair return if I need to make a claim.
When GAP Insurance is Most Relevant
The need for GAP insurance is not universal; it depends heavily on your specific circumstances, particularly the type of car you own and how you financed it. For those who have bought a new car using a PCP finance agreement with a small deposit, GAP insurance is often considered highly necessary. This is because new cars depreciate rapidly, and a PCP agreement typically involves paying off the car’s depreciation over the finance term. If the car is written off early, the market value might be less than the outstanding finance, creating a significant £4,000 shortfall that comes out of your pocket. In such scenarios, GAP insurance is deemed to have the most exposure to the depreciation gap.
Conversely, GAP insurance is usually not needed for company cars or lease agreements like Contract Hire (PCH). This is because, in these cases, you do not own the car; you are simply paying for its use. The leasing company or employer bears the risk of depreciation. Similarly, if you bought a car outright with cash or have paid off your finance agreement entirely, the need for GAP insurance diminishes significantly. The primary function of GAP is to cover the gap between the car’s current value and what is owed, so if there’s no outstanding finance, that gap is much smaller or non-existent.
My approach would be to first check if I have any outstanding finance on the vehicle. If I do, I’d then calculate the current market value of my car and compare it to the remaining balance on my finance. This comparison would tell me if there’s a potential shortfall that GAP insurance could cover.
Common Misunderstandings About GAP Insurance
One common misunderstanding is that GAP insurance is the same as fully comprehensive car insurance. While both are types of car insurance, they serve different purposes. Comprehensive insurance covers damage to your vehicle, theft, and third-party liabilities. GAP insurance, on the other hand, only covers the financial shortfall if your car is written off and the payout from your comprehensive policy isn’t enough to cover your outstanding finance or the original purchase price. You need comprehensive insurance first before GAP insurance becomes relevant.
Another point of confusion relates to the different types of GAP insurance available. Not all GAP policies work in the same way. For instance, Return to Invoice (RTI) GAP insurance pays the difference between the motor insurance settlement and the original invoice price of the car. Finance GAP insurance, however, covers the difference between the settlement and the outstanding finance balance. Vehicle Replacement GAP insurance aims to provide enough to replace the car with an equivalent new model. Understanding which type of policy best suits your needs is crucial, as they offer different levels of cover.
A third common oversight is assuming that dealer-provided GAP insurance is always the best or only option. While convenient, dealer GAP insurance typically costs between £200–£500. Standalone GAP insurance, purchased directly from specialist providers, is often significantly cheaper, costing between £80–£250 for similar cover. It’s also worth noting that dealers must offer a 4-day deferral period, allowing customers time to shop around and compare prices before committing.
If I were in a situation where a dealer offered me GAP insurance, I would politely decline the immediate offer. I would then use that 4-day deferral period to research standalone providers and compare their prices and policy details against what the dealer offered.
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Navigating Your GAP Insurance Options
When considering GAP insurance, understanding the different policy types is the first step. The most common are Return to Invoice (RTI), Finance GAP, and Vehicle Replacement GAP. RTI is beneficial if you want to recover the difference between the insurer’s payout and the car’s original purchase price. Finance GAP is specifically designed to clear any outstanding finance if the payout is less than what you owe. Vehicle Replacement GAP aims to get you into a brand-new equivalent model if your car is written off.
| Policy Type | Covers Shortfall Against | Best For |
|---|---|---|
| Return to Invoice (RTI) | Original Invoice Price | Recovering the full original purchase price. |
| Finance GAP | Outstanding Finance Balance | Clearing any remaining debt on your car loan. |
| Vehicle Replacement | Cost of a New Equivalent Model | Replacing your written-off car with a brand-new model. |
| Agreed Value | Pre-agreed Fixed Sum | Simpler policies with a set payout amount. |
If you’ve bought a new car and want to ensure you can replace it with the exact same model if it’s written off, Vehicle Replacement GAP is likely your best bet. If your main concern is simply clearing any outstanding finance, Finance GAP is more appropriate. Some policies also offer an ‘Agreed Value’ option, which pays out a pre-agreed fixed sum.
When purchasing, always compare prices between dealer-offered policies and specialist standalone providers. As mentioned, dealer GAP insurance can cost between £200–£500, while standalone policies are often much cheaper, ranging from £80–£250. It’s also important to check the policy’s terms and conditions carefully. For instance, ensure the policy covers the full value of your outstanding finance or the original purchase price, depending on the type of GAP insurance you choose.
For those concerned about theft or accidental damage to their vehicle, a dash cam can provide valuable evidence. The Garmin Dash Cam X310 offers 4K recording, a wide-angle lens, and GPS tracking, which could be useful in documenting incidents.
If I were in a situation where my car was written off, my priority would be to understand the exact amount my standard insurer was offering and compare it to the total amount I owed on my finance. This would immediately tell me if GAP insurance was necessary to cover a potential shortfall.
Frequently Asked Questions About GAP Insurance
What is GAP insurance?▾
Do I need GAP insurance for a used car?▾
Can I buy GAP insurance from my car dealer?▾
What happens if my car is stolen and I have GAP insurance?▾
How much does GAP insurance typically cost?▾
GAP insurance can be a valuable tool for specific car owners, particularly those with new vehicles on finance. However, the recent regulatory scrutiny highlights the importance of understanding its value proposition and comparing options carefully. By understanding the different types of policies, their costs, and your own financial situation, you can make an informed decision about whether GAP insurance is the right choice for you.
If this was useful, you might also want to read Telematics: Friend or Foe? What UK Drivers Think of In-Car Data.
Sources and Further Reading
Telematics: Friend or Foe? What UK Drivers Think of In-Car Data — This article explores how in-car technology affects car insurance premiums and driver behaviour.
Tips to Navigate Your Car Insurance Non-Renewal Appeal — Learn how to appeal a car insurance non-renewal and what steps to take if your insurer decides not to offer you cover.
GAP insurers agree to suspend sales following FCA concerns over fair value. Financial Conduct Authority, 2024.
Gap Insurance: Do You Need It?. NimbleFins, 2024.
Gap Insurance Car Finance UK. Pocketwise, 2024.
