The City regulator has given firms producing a type of add-on insurance to motor cover an ultimatum to demonstrate they are providing fair value.
Firms that are unable to prove they are providing fair value to their customers should expect further action, the Financial Conduct Authority (FCA) said.
The FCA said it had identified evidence that some guaranteed asset protection (GAP) products may be failing to provide fair value to customers.
GAP insurance is an add-on to motor insurance, covering the difference between a vehicle’s purchase price and its current market value.
It may be needed when there is a financial shortfall, if for example a customer’s vehicle is written off or stolen, or the motor insurance payout does not pay back the vehicle’s original value at purchase.
According to FCA data, for GAP insurance, only 6% of the amount customers pay in premiums is paid out in claims.
The FCA said it has also seen examples of some firms paying out up to 70% of the value of insurance premiums in commission to parties in the distribution chain, such as motor dealerships.
The regulator said it has told firms manufacturing GAP insurance products that they must take immediate action to prove customers are getting a fair deal, or it will intervene – giving firms a three-month ultimatum.
It has also sent letters to all insurance firms, reminding them of its expectations to make sure they are checking their products are providing fair value to their customers.
A new, wide-ranging consumer duty was introduced on July 31, requiring financial firms to put consumers at the heart of what they do, from designing products to dealing with customers.
Matt Brewis, director of insurance at the FCA, said: “This is an early signal of the work we’ll be doing under the consumer duty.
“Customers should be reassured that we’re in their corner and are taking action where we see poor value being provided.
“If the firms are unable to prove they’re providing fair value to their customers, they should expect further action from the regulator.”
Rocio Concha, Which? director of policy and advocacy, said: “At a time when many insurance customers are paying sky high premiums amid the worst cost-of-living crisis in decades, these figures clearly demonstrate that parts of the market aren’t providing value for money for consumers.
“It is very concerning to see that payouts for guaranteed asset protection are sitting at 6% of what these firms take in premiums – despite the regulator raising concerns about value for money almost a decade ago…
“The FCA has left firms in no doubt over their obligations to their customers, and failure to meet deadlines set for improvements must result in immediate action by the regulator.”
Vicky Shaw, Press Association