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Sandy’s Impact on GAP a 'Small Blip,' Says Insider

November 8, 2012

The National Automobile Dealers Association (NADA) estimates that about 250,000 vehicles were lost during Hurricane Sandy, but an actuary specializing in debt waiver contracts doesn’t believe a key F&I product is in danger.

Quoting statistics from the National Association of Insurance Commissioners, Gary Fagg, president of actuarial firm CreditRe, said New York and New Jersey represent only 5 percent of GAP products sold in the U.S. market. He said providers of GAP will feel some effects, but added that the impact would equate to a “pretty small blip” on a national level.

“In the grand scheme of things, [Hurricane Sandy] is not going to move the needle because New York and New Jersey aren’t major GAP markets,” Fagg said. “If this would have happened in big GAP states like Texas, California and Florida, this stuff could change the numbers.”

Although damage estimates are still coming in, Fagg doesn’t believe the amount of GAP claims filed will cause a change in pricing for GAP or coverage.

Fagg said New Jersey sells about 50,000 GAP policies a year. Nationally, about 1.5 million policies are sold per year.

State regulations in New York may also mute the impacts of the hurricane on the product. Dealers operating there are required to offer GAP, but they aren’t allowed to mark it up. Because of that requirement, Fagg said there is very little traditional F&I GAP being sold in New York by typical writers of the product.

“Consequently, there’s virtually no dealer reinsurance of New York GAP risk,” Fagg added. “Bottom line is there’s going to be a small spike in GAP losses, particularly in New Jersey. But it’s a small blip.”

Other F&I products such as paint and fabric protection, and key replacement will also take a hit, but Fagg doesn’t believe enough of those products are sold there to cause a big change in how those products are administered. Fagg, however, couldn’t estimate the impact of the hurricane on vehicle service contracts.

About 600,000 vehicles were lost during 2005’s Hurricane Katrina, but Fagg said the disaster had less of an effect on GAP than the product’s underpricing problems between 2002 and 2006. That’s when an overly competitive market for GAP caused some providers to lower their prices.

“Katrina was a minor catastrophe to the whole general underpricing that was going on at that time,” Fagg said. “It was just blood in the streets at that time.”

Fagg said prices for GAP were corrected by 2008. He added that GAP enjoyed great years between 2010 and 2012, mainly because the recession caused used-vehicle prices to appreciate. “If used cars rise in value, gap loss severity drops,” Fagg noted.

“In the grand scheme of things, it’s not a big event,” Fagg said of Hurricane Sandy impact on GAP. “It’s a blip, but insurance companies are used to blips every six years.”

Vehicles to Be Scrapped After Storm

Toyota/Lexus: 4,000

Nissan/Infiniti: 6,000

Honda/Acura: 3,900

Hyundai: 400

Kia: 200

GM: Undetermined

Ford: Undetermined


  1. 1. Tony Wanderon [ November 16, 2012 @ 01:55PM ]

    While this storm may be a blip for retail GAP, lease GAP will incur substantial losses with this event. Historically blanket lease GAP programs are much lower reserved for and NY and NJ are big lease volume areas. I would think those carriers who underwrote that business, will be taking a big hit. In addition, the issues in 2002-2006 were not just due to under reserving, but the lack of proper underwriting guidelines, which caused substantial losses since. Today clearly is different in that respect, but concentrated risk and underpricing is something that is still happing today, especially on blanket GAP in the North East


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