GAP Past & Future: Industry Experts Weigh In

Guaranteed asset protection, better known as GAP, is a product that is ubiquitous in the industry today, but it was not always that way. Where exactly did it come from? And where do our experts from Allstate Dealer Services, James Dean and Tara Webb; Tony Wanderon from Family First Dealer Services; Safe-Guard’s Dave Duncan; and Matt Croak from Wise F&I believe that it’s headed?

Those experts agree that GAP got started in the mid-to-late 1980s, primarily as a lease product. However, the lease companies themselves quickly started adding it to their own terms, leaving GAP providers with the need to retool it. That is when the product as we know it today was born.

“GAP insurance was introduced to the marketplace in the early 1980s,” noted James Dean, Director of Product Development, and Tara Webb National Sales Director, Allstate Dealer Services. “The traditional name for GAP insurance is ‘Shortfall’ which is still used today by some manufacturers. The product was developed to cover the shortfall on finance agreements and leases.”

“It was the most likely area for customers to have negative equity, as leases had small or no down payments, and customers were paying little towards the principal at the start of their lease terms,” said Dave Duncan, president, Safe-Guard Products International LLC. “GAP eventually became a complimentary product with most leases. Shortly thereafter, retail loan customers began experiencing negative equity, and GAP shifted to a core product for the retail installment loan customer.”

“GAP, as an addendum to the finance contract, was a novel concept to some degree,” said Matt Croak, president, Wise F&I. “We realized early on that lender acceptance would be critical so we began slowly with our first approval from the former GMAC in the early ’90s. We quickly expanded the lender submission program to include over 200 lenders active in the dealer space. Over a period of 4-6 years, lender acceptance of GAP grew tremendously. The lender submission process and the accompanying legal review assisted us to further develop and define the features and benefits of a typical GAP contract as we know it today.”

Tony Wanderon, president and CEO, Family First Dealer Services, noted, “The terms started getting longer, prices went up and the need for the product grew, from the consumer perspective. But it was on its infancy on the dealer side. People liked it, but didn’t feel it was a main, core product to offer to customers. Some didn’t like talking about negative equity at all — talking about it might push [the customer] not to purchase. But as time went on and got into the mid-’90s, the product started to take hold.”

At that time, Wanderon said, there were a lot of questions in the industry about whether it was an insurance product or a debt forgiveness product. Federal regulators also were trying to figure out where it fell, so they could deal with it appropriately. Anticipating an unfavorable verdict, many providers dropped their offerings. Ultimately, the government declared that GAP was not a product that needed to be included in the interest rate of the loan — although stipulations were put in place as to what it should and should not include. This made it a product that was suddenly more attractive to lenders to include in their financed packages.

“It’s one of the few products that benefits all parties involved,” Wanderon noted. The consumer is covered and taken care of, dealers are looked at in a negative way if the customer is upside down, so now they can negate this. And it covers the bank loan, so if there is negative equity, banks can still collect the full amount.”

An Evolving Product

That is not to say that the product has not continued to change, however. Early versions were missing the structure it has today — there were no caps on amounts to be paid, the policy and benefits provisions were very broad, there was no underwriting of the product and there was not any real actuarial risk analysis of GAP at the time. So it has evolved from where it once was.

“Changes in financing, negative equity and loan terms have been primary drivers to the evolution of the GAP product,” noted Dean and Webb. “Primary carrier deductible reimbursement, increased loan to value limits, expanded loan terms, cancel-ability and GAP Plus are features that were not components of GAP when it was originally introduced in the marketplace. GAP was originally considered an insurance product in many states, and through our extensive work with the members of GAPA, we have collectively made strong headway in influencing state adoption of a more consumer-friendly, debt waiver product. The rating structure has also evolved from a one rate structure of earlier versions to a rating structure that more closely aligns with the loan/lease term.”

Dean and Webb also noted that there have been several factors helping to drive the growth of GAP in the past, that they believe will continue to be drivers in the future. “Two of the more important drivers in GAP performance are residual values and loan to value (LTV) amounts. As we move through different economic cycles, the impact of these two factors affects the loss performance of GAP. In the past few years, GAP loss performance has been stable and better than prior years; however there are definite indications that this trend is changing, particularly in residual deterioration. GAP’s success in the marketplace has been a result of: a) increased LTVs and higher amounts financed driving larger “gaps” in the event of total loss; b) expanded multi-media forums providing a better understanding to consumers and lenders of the value the product brings to the borrower; and c) fluctuating vehicle values correlating with fuel prices - a borrower can be in a negative equity, then a positive equity, then back into a negative equity position all due to factors out of their control. Borrowers are becoming increasingly aware of this and choose to purchase GAP to protect themselves against these factors that out of their control.”

“Greater acceptance and higher production volume brought greater scrutiny to GAP,” noted Croak. “The net effect resulted in GAP contract terms that delivered superior protection to the consumer. The elimination of ‘greater of’ language within the calculation of the GAP amount is one example where the typical GAP contract was refined for the consumers’ benefit. Additionally, the concept of ‘True GAP’ or ‘Settlement GAP’ is more apparent now than ever. As with most contracts in general, the notion of ‘good faith’ is very important. Modern GAP contracts do a much better job of defining the roles and responsibilities of both the consumer and the creditor as it relates to GAP.”

Croak went on to note that he has seen stabilization in GAP in terms of pricing in recent years as well. “Early on, we saw insurance carriers enter and exit the GAP space as an underwriter on a frequent basis. This seems to have now stabilized,” he said. “We have been marketing GAP since the beginning and have been able to compile decades worth of data, allowing us and many of the prevailing GAP underwriters to develop better actuarial analysis. This data allows for greater understanding of how GAP performs, resulting in more responsible and accurate, risk-based pricing decisions. “

“I think it became a very structured product, and a very consistent product and program in the mid 2000s,” Wanderon said. “Lenders started looking at it a lot more closely, making sure it had proper insurance, proper capital, that admins are managing the customers properly, etc. The product today is very solid, consumer-friendly and meets all the regulatory requirements that have been set.”

Duncan laid out some of the changes he has seen in the product as well: “The terms of loans have grown, resulting in three categories for the GAP product — 0-60 months, 61-72 months and 73-84 months. Settlement coverage has been added to many programs, since retail GAP only covers the difference between the vehicle's value determined by NADA/KBB and the loan payoff amount. If the primary insurance company has determined the settlement to be less than the actual cash value, then the retail GAP customer is stuck paying this difference. And ‘GAP plus’ is another option that can be offered. The program provides an additional benefit, usually in the amount of $1,000, that the customer can use towards the purchase of his or her replacement vehicle.”

Croak also focused on the regulatory environment, noting that it is something dealers, agents and providers will all have to be aware of, not just for GAP, but for all F&I products. “In recent years there has been a large focus on compliance by federal and state regulators on all products that are offered in the F&I office,” he noted. “As unfortunate as it may be, GAP products and other F&I product offerings will be influenced by these regulations. On a federal level, the CFPB is asserting influence on these products, not so much at the dealer level, but through the lenders. The way that Gap is marketed could be influenced by these variables.”

Wanderon in many ways sees GAP as being one of the products that helped propel F&I into the business that it is today. He noted that, before, most dealerships carried only a handful of ancillary products, but GAP was among those that moved the market to offer, in some cases, 20-plus products for consumers to choose from. “It spawned an industry to offer products to customers in a wide range of categories,” he noted.

So where can GAP go from here? Our experts see growth for the product, but in different ways.

Wanderon believes penetration rates will average around 30-40 percent — but he believes that growth will occur as more cars are sold, and therefore GAP is offered to more customers. He also sees the penetration rate climbing in certain cases, where the customer makeup of the dealership is a bit more open to seeing the risk/reward benefits. In those specific cases, he noted, he sees the penetration rates hitting around 60 percent.

“There are infrequent requests to consider pricing GAP around LTV, credit scores, amount financed and expanded term bands,” said Dean and Webb. “These are components that have been considered for many years but have not been fully implemented by the industry due to the fact that it is currently a simple product for dealers to sell at three or four easy term bands. This, coupled with both lender governance on the product structure and the administrative burden carriers would face to create a more sophisticated pricing approach, will likely deter significant changes to the way GAP is currently packaged and sold.”

They don’t see it as remaining completely static, however. “CFPB outcomes may drive the manner in which GAP is packaged and priced to consumers in the future,” said Dean and Webb. “Allstate is SOC 1 certified, an active member of GAPA and maintains a watchful eye on calibrating our products to fit the changing regulatory environment and consumer marketplace. We have seen more states adopt regulation requiring lenders to properly manage cancellation refunds due to prior litigation; changing lender governance practices of the product could shape GAP in the future.”

Duncan sees the penetration rate itself increasing. “GAP penetration is directly related to the aggressiveness of lenders,” he said. “We know that longer loan terms and lower down payments all lead to an increase in GAP penetration. According to Experian Automotive, the average loan term for new and used vehicles is up to 65 months for new and 61 months for used, as of Q2 2013. While training and the macro-environment can have an impact on market share, really educating customers by using a good interview, focused menu selling and prepared objections handling will make the biggest difference.”

For the product itself, everyone is optimistic. “I see it becoming much more of an integrated process for a consumer to process the claim quickly, pay quickly and understand the impact the event has had,” Wanderon said. “I can see it morphing into more of a consumer-friendly program; I don’t see a lot of changing and adding substantial benefits, because then you increase the price, and lenders control what price they will advance on the loan. There could be something in the future: If the benefits go up, will the lender allow the costs to go up?”

“The success of GAP as a product has truly been driven by the long-term providers, working in conjunction with major lenders and underwriters, to continually refine the protection provided by GAP coverage,” Croak noted. “Expanded lender guidelines, driving increased financing volume during the second decade of GAP’s existence, provided a foundation for making GAP as successful as it is today. As we move into the future, increasing market share will involve the continued partnership of providers and lenders along with enhanced training for those at the F&I desk. If we, as an industry, continue to equip F&I personnel to better offer, describe and provide feedback to consumers, we’ll continue to see increased growth in GAP originations.”

“We anticipate GAP to continue to be a strong value-add to consumers looking to protect themselves from risk and factors out of their control,” said Dean and Webb. “Given the increase in multi-media forums available to consumers, we anticipate an increasing awareness of the product and thus a stronger demand from those who need it – regardless of the channel in which it is distributed.”

“I see GAP continuing to be a top-performing product among ancillary F&I products,” Duncan noted. “Negative equity is not going away anytime soon, and properly educated customers really see the product's value. GAP will be successful in all channels where retail financing is involved. Since retail financing is getting more aggressive, GAP should benefit from this dynamic. With the downturn of 2008, fewer vehicles were financed and banks were requiring larger down payments, so GAP sales decreased. With the return of aggressive financing, GAP penetration has recovered nicely.”