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The ground rules of GAP in an FCA-scrutinised market, a guest opinion

Rich Green, president of UK Automotive at Assurant Europe

The Financial Conduct Authority (FCA) said, as part of its 2018/2019 Business Plan, it would strive to investigate the effectiveness and impact of its interventions into certain markets and industries.

As widely publicised, the FCA aims to conduct three pilot evaluations of such markets and practices, the first of which is an evaluation of the FCA's September 2015 intervention into Guaranteed Asset Protection (GAP) insurance. 

This theme has been carried forward into its 2019/20 Business Plan, following the publication in April of the general insurance (GI) thematic review of value in the GI distribution chain and delegated authorities.

The thematic review highlighted that the FCA has determined there could be harm from customers buying unsuitable products or paying too much, due to the level of remuneration in the distribution chain.

It has published proposed non-handbook guidance to set out minimum expectations of firms, where their proposed guidance clarifies the meaning of the new Insurance Distribution Directive (IDD) rules, which should address many of the key problems that have been identified.

Through the lens of the supplier and/or insurer, regulatory scrutiny of GAP has long been commonplace within today’s motor ancillary add-on market.

Which is why, following not only the thematic review and subsequent regulatory interventions at the point of sale, the FCA mandates and expects all GI firms to put customers at the heart of their business models and have appropriate regard for the value customers receive from the GI products and services they manufacture and distribute.

This expectation applies to firms in all parts of GI distribution chains and is underpinned by its rules and the Principles for Businesses, which firms must comply with.

An underpinning outcome of this is how GI firms consider the impact that their distribution strategy has on the overall value of the product to the end customer.

Their stance remains that firms must ensure that the remuneration they receive for their insurance distribution activity does not conflict with their duty to comply with the customer’s best interests rule.

Conversely, through the lens of the/an intermediary, questions are now being asked of an ever-decreasing supply chain, given the insurance model is changing, coupled with the fact this market has seen an unprecedented amount of disruption over the last 12 months.

GAP offers genuine utility and value to customers when appropriately distributed and priced. It is vital that the distribution chain operates appropriately to manage the risk, ensuring that the products are not compromised by remuneration received by the value chain, leading to potential harm to customers.

Consider how you can build trust with customers in providing the right balance of information, that is transparent and educational, through digital channels as well as within dealerships.

This gives customers the time to consider the benefits of GAP insurance, it validates research that the customer may have done and leverages your knowledge and expertise on the showroom floor.

When defining a product distribution strategy, it is important to work with an underwriter that can help implement a clear distribution and pricing strategy which considers the value the end customer receives from the product.

Assurant advocates the need to manage the level of remuneration to ensure a distributor’s remuneration bears a reasonable relationship to the benefits their services provide to the customer, as well as the role they provide in the distribution chain.

And when looking for a supplier relationship that delivers compliant products and services, there are other considerations too, such as:

  • Are you working with a financially secure, sustainable insurance partner to ensure customers have adequate GAP cover at all times?
  • Are you partnering with an underwriter who is committed to the UK GAP market?
  • Are you establishing a programme with an insurer who is experienced in the UK GAP market and offers sustainable pricing?
  • Have the products been researched and tested so that you can be confident they meet the customer’s needs?
  • Does the provider have the appropriate systems and controls in place to manage activities and mitigate risks that may be posed to customers?
  • Are you confident that the GAP insurance you sell, will be honoured for the duration of the policy?

All of these areas lend themselves to more a robust structure and selection criteria in evaluating credentials when it comes to choosing a supplier of GAP Insurance.

Taking all of this into account, it is now more important than ever that as a supplier you can evidence your surety and demonstrate that you have sufficient capacity, scale and expertise to offer customers the right product at the right price.

Author: Rich Green, president of UK Automotive at Assurant Europe

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