Insurance Helpline | Information gap on GAP insurance

QUESTION: Is GAP insurance available in Jamaica? If so, which company offers the best deal?

- R.T., Kingston 7

INSURANCE HELPLINE: Guess what? I have never heard of this term before. This is in spite of all my many years of experience in the insurance industry. The fourth edition of the Dictionary of Insurance Terms, edited by Harvey W. Rubin, PhD, CLU, CPCU, professor/chair of Insurance, Department of Economics and Finance, Louisiana State University, one of the major insurance gods - does not mention this term among the 4,200 definitions that it contains about the life, health, property, casualty, and other types insurance.

The first thing that I learned after checking my favourite Internet search engine is that GAP is an acronym. It is an abbreviation for 'guaranteed asset protection'. This phrase does not appear in my insurance dictionary. My search engine, by the way, contains 4.6 million items on the subject. After conducting some basic research on the subject and combining what I found out with information in Friday's Gleaner, I suddenly understood the context for your question.

Perhaps as much as a quarter of the column inches in that newspaper was devoted to automobiles. That included a special advertising supplement for buying a new car and full and quarter advertisements about special loan rates for car loans. This is where GAP insurance fits in.

GAP insurance was invented in the United States. Allstate, was the third largest insurer in the US in 2013. It controlled slightly over five per cent market share and had direct written premiums of US$27.6 billion. This is what it says on its website about GAP insurance.

"Certain coverages, like collision or comprehensive, may help cover the cost of repairs, minus the deductible and up to your policy's limits. If the car is deemed a total loss, however, your insurance company will likely pay only what the car is worth at the time of loss (called the 'actual cash value').

"This can be problematic when you own a new car. The US Insurance Information Institute (III) notes that new vehicles can depreciate in value as much as 20 per cent within their first year, and standard auto policies typically cover the actual cash value, which will likely be less than the purchase price.

"This means that if your new car is totalled in a covered loss, the insurance reimbursement cheque may not be enough for you to purchase another new car. If you also have an auto loan, you would still be responsible for paying off the remaining balance, regardless of whether you can still use the car.

"Guaranteed Asset Protection, or GAP coverage, may help pay the difference between the amount owed on an auto loan or lease and the totalled car's actual cash value. Even if your car can no longer be used, you're still responsible for any remaining loan or lease payments. So if the reimbursement cheque from the insurance company is not enough to cover what you owe, GAP coverage may help pay for the remaining amount on a loan or lease - so you won't be stuck paying for a car that is now in the scrap yard."

GAP insurance was exported to the United Kingdom. However, in September 2015, according to Wikipedia, the Financial Conduct Authority (FCA), the insurance regulator, changed the way that GAP insurance was sold by car dealers in the UK.

Claims ratios for GAP insurance - that is, the amount paid out in claims in comparison to the premiums paid - were just 10 per cent between 2008 and 2012. This means that just $10 was paid out for every $100 paid in premiums. Insurers were making bags of money after expenses were paid.

The proactive FCA concluded that consumers were getting poor value for money. Car dealers, who bundled the coverage with the price of the car, were also making a killing. FCA required car dealers to: i) make consumers aware that other suppliers exist; and ii) delay the transaction by two business days.

Talk to your insurer or broker to find out if GAP insurance is locally available, the price for the coverage, and the loss ratio. Once you have that information, you'll be in a position to make a decision.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com