Briefing: What next after Gap?

By Matt Scott

Everyone had expected the FCA to get more interventionist this year off the back of its new Consumer Duty regulations – and now people are beginning to see what those interventions will look like.

Last week (9 February 2024), the regulator followed up on its Dear CEO Gap letter by announcing it had reached an agreement with insurers to cease selling the contentious product.

Rumours are also starting to circulate that fines could be imminent.

Sheldon Mills, executive director of consumers and competition at the FCA, stated quite firmly that Gap insurance “does not offer value” in its current form and the regulator is looking for changes to be made before the products go back on sale.

And it is not hard to see why the regulator has this dim view of Gap insurance.

Insurance DataLab’s analysis of FCA value measures found that Gap paid out just 7% of premiums in claims in 2022 when sold as a standalone product.

For add-on policies, this figure was as low as 4% – anyone would find it difficult to justify how that represents value.

Regulatory investigation

All of these stats beg the question – are there other areas of the market that the regulator may be looking at?

Well there are a number of business lines that have a payout rate of 30% or less, the level at which some in the industry think the FCA may draw the line of acceptability.

These include motor excess protection – 15% for add-ons and 30% for standalone policies – personal accident cover, which has a 19% payout rate, and home emergency add-ons, with a rate of 26%.

All in all, these business lines with low payout rates account for almost 13.7m policies and are worth close to £690m in gross written premium (GWP) across the industry.

Many of these products also have claims frequencies sitting around the 1% to 2% level, so it is easy to see why the regulator may be taking a closer look.

The next set of value measures covering 2023 are currently being pulled together by the industry, so it could be that additional products are added into the mix once the latest round of reporting has been completed.

Travel insurance is one such business line that could come under the microscope.

European travel cover had a payout rate of just 9% in 2021, while worldwide cover paid out just 11% of premiums in the form of claims.

And in 2022, European travel insurance policies paid out less than a third of premiums in claims, so it would not be a big shock if that figure were to fall back below the 30% level once again.

For now, all the industry can do is sit and wait to see that the regulator’s next steps will be. Looking at the data, there are certainly a number of options out there for the FCA’s next intervention.