Variety of Factors Impact GAP Insurance

A number of economic and environmental factors have converged in recent years to bring about changes in guaranteed asset protection (GAP) insurance, a product that is profitable for the dealer and an excellent value for the customer. (Dealers offer GAP to customers leasing a new vehicle or financing most or all of one. If a vehicle is declared a total loss or is stolen and not recovered, GAP covers the difference between the amount owed on the vehicle and the customer’s insurance settlement. Many policies also cover some or all of the customer’s deductible.)

On the economic front, the high cost of gasoline has de-valued less fuel-efficient vehicles such as SUVs, placing more pressure on companies that issued GAP policies. Another impact came from Katrina, which damaged more vehicles – 570,000 – than any hurricane in history. In light of these events, dealers will see changes in their GAP insurance products. For example, they may see higher cost as the industry better understands the exposures involved. Retail policy prices have risen from about $400 to $700.

Given the state of turmoil, dealers may want to reconsider their approach to GAP insurance. For one, they should carefully determine the need for GAP insurance, including the percentage of the sale price and length of time that the customer is financing and the projected number of miles driven annually. Dealers should also follow standard business practices in evaluating the insurance provider, including carefully reviewing the master policy, determining that the company is properly rated and that an updated dealer waiver is in place, ascertaining that the dealer can market the policies as well as sell them, and of course confirming that the provider actually has the funds necessary to support its program.