Guaranteed asset protection is a no-brainer. The value to the customer is clear, as is the benefit to the dealer who offers it and the F&I professional who sells it. And if you wish to improve your GAP penetration rate, now is a great time, because the numbers are on your side.
At last month’s Agent Summit, Tony Wanderon, CEO of National Auto Care and Family First Dealer Services, teamed up with Allstate Dealer Services’ Ben Woods to present “The GAP Crisis: Would You Underwrite It?”
Among F&I product providers, Wanderon is widely regarded as the godfather of GAP, having been a tireless advocate since its inception. Woods is no slouch himself. Together, they broke down the history and performance of a product whose market is valued somewhere north of $7 billion and is almost entirely dealer-controlled.
GAP was introduced in the 1980s and first found its footing as a lease product. (As Wanderon explained, many dealers initially feared sales customers would be scared off once they realized they owed more than their new vehicle was worth.) It gained ground as a product offered on retail installment loans as down payments grew smaller and terms grew longer.
“Never in my career have I seen a product take off like that,” Wanderon said of GAP’s “explosive” growth starting in the late ’90s. But underwriting and regulatory difficulties began to arise in the 2000s, a trend that has reemerged of late.
The most recent serious legal challenge was a December 2017 reinterpretation of the federal Military Lending Act that effectively ended sales of GAP to servicemembers. This remarkably shortsighted guidance has put countless soldiers and sailors at risk of financial devastation. In January, the American Financial Services Association’s Bill Himpler told AFSA conference attendees that the U.S. Department of Defense’s decision could soon be reversed with the help of the Trump administration.
Financially, plummeting retained values — particularly among sedans — have coincided with increasingly frequent collisions (up nearly 10% since 2012) and total losses (up 30% since 2011). In flood-prone Texas, loss ratios that once varied between 30% and 40% have ballooned to 140%. Repricing and tiered pricing have alleviated but not eliminated the strain. Many underwriters have fled the business.
But GAP’s supporters remain fervent.
“There have been some good years for GAP from an underwriting side,” Wanderon said. “But they tend to come with some really challenging years as well. And we’re in some challenging years now.” Nevertheless, “It’s not really a crisis. The risk is changing and adjustments need to continue to be made. The GAP market today is bigger and better than ever.”
Asked whether F&I managers can capitalize by sharing these numbers with indecisive customers, Wanderon was not opposed. But he suggested starting with an example of a past customer who benefited from the product. And he stressed the fact the value is maximized if the customer buys now, at the dealership, rather than later, from their insurance company. Dealer-waiver GAP coverage can cover up to 150% of MSRP, carry over coverage for negative-equity trade-ins, and offer deductible reimbursement up to $1,000.
The alternative is auto insurers, who control about 1% of the market, only offer GAP for new vehicles, only cover up to 125% of MSRP, offer no deductible reimbursement, and want nothing to do with the customer’s trade-in. And if they switch providers, they can’t renew.
So good luck with your next negative-equity deal. Despite its troubles, GAP remains a win-win-win for your customers, your dealership, and your numbers.