Guaranteed asset protection (GAP) insurance is an essential financial product that protects vehicle owners from the difference between their car’s actual cash value and the remaining car loan balance in the event of a total loss. In a rapidly evolving automotive and financial landscape, accurately evaluating GAP insurance is difficult and volatile.
Current trends remain unfavorable, especially in light of volatile used car prices. Results vary widely by loan-to-value at purchase as well as type of vehicle.
How GAP Insurance Works
GAP insurance protects vehicle owners by paying off the difference owed on their outstanding auto loan amount and their car’s market value if their vehicle is declared a total loss due to theft or accident. Traditional auto insurance typically covers the vehicle’s market value at the time of the loss but not the remaining loan balance. GAP insurance covers this gap, ensuring borrowers aren’t left owing money on a vehicle they no longer have.
As vehicles depreciate quickly, especially in the first few years, GAP insurance can be a sound purchase for the borrower which adds significant value. Borrowers with low down payments, extended loan terms, or financed add-ons like warranties or extended service plans might benefit most from GAP insurance.
Major Factors Driving Losses
GAP exposure is quite complicated and there are loss drivers from three major sources, all of which can cause volatile results.
1. Vehicle Depreciation Patterns
One of the core factors influencing GAP insurance analyzing is vehicle depreciation. Actuarial models evaluate how quickly different vehicles—such as luxury cars, used cars, or electric vehicles (EVs)—lose value over time. Cars with higher depreciation rates pose a greater risk to insurers, reflected in higher premiums. Depreciation patterns will vary depending on the type of vehicle. In general, smaller cars, luxury cars and EVs will depreciate more quickly than SUVs or trucks.
In addition to these vehicle specific terms, the used vehicle market is subject to volatility. After Covid, used car prices rose dramatically and then fell. Values in 2024 were relatively stable. For example, a decline in used-car values will widen the gap between a vehicle’s market value and the loan balance, leading to higher claims costs.
2. Loan Terms and Borrower Behavior
Loan-to-value is strongly correlated to loss exposure Loan-to-value (“LTV”) is the ratio of the borrowed amount and the vehicle value. For example, if the vehicle is worth $20,000 and the loan is $19,000, the LTV would be 0.95. Higher LTVs will have higher claims.
Suppose the borrower in the example above totalled their car as they were leaving the dealership. In this case, there is no GAP since the vehicle is worth $1,000 more than the loan. Suppose the LTV ratio was 1.20. This would imply that the loan was for 24,000. In that case the gap claim would be $4,000. So it is easy to see how the LTV ratio can dramatically impact claims.
Longer terms also have increased costs due to loan amortization. In addition, many institutions modify loans by delaying payments (“skip-a-payment”) which can increase losses.
3. Underlying Private Passenger Market
Changes in the frequency and settlement patterns for private passenger companies are also pressuring GAP results. Increasing total loss frequency is a long-term trend increasing loss costs and can be somewhat hidden by the volatility from changes in used car values or financing.
In 2023, over a quarter (27%) of collision claims were deemed total losses, which is a significant increase when compared to historical trends. This percentage has remained stable from the previous year, but compared to 2020, there has been a jump of 29% in total loss claims.
Newer vehicles have more advanced technology which increases the repair cost to the level it will be declared a total loss.
Although crash frequency has not spiked back to pre-pandemic levels, the severity of these crashes has increased. Physical damage claims have seen a 47% increase in severity. This indicates that while crashes might be less frequent, but when they do happen, they result in more significant damage (and injuries).
In 2023, the overall claim frequency and severity for EVs were 17% and 34% higher, respectively, than for traditional internal combustion engine vehicles. This contributes to a higher total loss rate for EVs due to the high cost of battery repair or replacement.
Analyzing GAP in a Volatile Market
Despite GAP insurance’s significant value, accurately analyzing it presents several hurdles. Rapidly changing market conditions, such as the volatility of used car values and the impact of changing loan terms can make the prediction horizon short.
As EV adoption grows, insurers must address the unique challenges of their high depreciation rates. GAP losses are likely to remain elevated due to the long term trend of increasing total losses.
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