The Financial Conduct Authority (FCA) has continued to express concern over the value proposition of Guaranteed Asset Protection (GAP) insurance, with some firms struggling to demonstrate fair value as required by the Consumer Duty, and warns that it will intervene where necessary to protect consumers.
“Our latest data collection continues to highlight some products that do not appear to be delivering fair value” the FCA said in its latest report, released today.
Claims costs as a proportion of premium range from 10% for GAP insurance (add-on) to 72% for healthcare cash plans.
Meanwhile healthcare cash plans led in the percentage of claims for all types of insurance paid out in 2023, with a total of 71.6%.
Dental insurance performed less well with a total of 42.3%.
Performing even less well was mortgage payment protection insurance (PPI) with a paid out percentage rate of just 27.5%.
The FCA said: “Senior leaders and board members should take note of our actions on GAP insurance and must satisfy themselves that firms are compliant with Prod 4 and the Consumer Duty.
“They must make sure they are satisfied that the products they offer provide good value to consumers.
“Where our data suggests that value appears low, we will be in touch with firms later in the year to understand their products and the actions they have taken to improve value.
“Where we believe a firm has failed to act and is still providing poor value products, we will intervene where necessary to protect consumers.”
The FCA said firms should carefully consider the difference between the risk price and the total price paid by the customer.
“The larger the difference between risk price and total price, the more we would expect firms to show why the other costs provide fair value and fairly reflect the quality of the product or services provided.”
Action for firms
The FCA said it is concerned that a number of firms appear to be reporting data that could suggest a large difference between the risk price and the total price paid by the customer.
The FCA said: “This may present similar risks of harm as those we identified in the GAP insurance market.”
It said firms must be fully compliant with PROD 4 rule: including:
“A firm must make sure that the product approval process identifies whether the product provides fair value to customers in the target market. This includes whether it will continue to do so for a reasonably foreseeable period, including following renewal (PROD 4.2.14A R).
“A firm must be able to clearly demonstrate how any product provides, and will provide for a reasonably foreseeable period, fair value (PROD 4.2.14C R (1)).
“Where the firm is unable to identify and clearly demonstrate that a product provides fair value, the firm must not market the product or permit the product to be distributed, or must have made sure appropriate changes have been made so that fair value will be provided (PROD 4.2.14C R (2)).
“The risk price and the total price paid by the customer should bear a reasonable relationship to the actual costs incurred by the firm or any other person involved in the distribution arrangement, the quality of any benefits, and the costs or quality of any services provided (PROD 4.2.14M E).
“A firm must, as far as reasonably possible, ensure the distribution arrangements for a non-investment insurance product avoid or minimise the risk of negatively impacting the fair value of the insurance product or package (PROD 4.2.14N R).”
The FCA concluded by emphasising: “We will challenge firms to make sure consumers get fair value from vital insurance cover.”
