The Financial Conduct Authority believes some car insurers may not be offering a fair deal to customers buying the optional extra.
Guaranteed asset protection (GAP) is an car insurance add-on which covers the difference between the value of a vehicle when it was purchased and its current market value.
Drivers with GAP are protected in case an insurer won't pay back the vehicle's original value if it’s written off or stolen.
But, the FCA found only 6% of the amount customers pay in GAP insurance premiums is paid out in claims.
The FCA has also seen examples of some firms paying out up to 70% of the value of insurance premiums in commission to parties in the distribution chain, such as motor dealerships.
It has given GAP insurance providers an ultimatum - immediately prove customers are getting value for money, or face FCA intervention.
Insurers have three months to act.
Matt Brewis, director of insurance at the FCA said: "This is an early signal of the work we’ll be doing under the Consumer Duty.
"Customers should be reassured that we’re in their corner and are taking action where we see poor value being provided.
"If the firms are unable to prove they’re providing fair value to their customers, they should expect further action from the regulator."
The action comes thanks to regulation introduced in 2021 which requires insurers to ensure their products provide fair value. They must submit regular Value Measures Data to the FCA which is then scrutinised and published.
Guaranteed Asset Protection (GAP) insurance is a way of protecting the value of your vehicle.
As time goes on the value of your car reduces despite it still being a perfectly good vehicle for you.
So if something happens to it unexpectedly, such as it being stolen or written off, the cost of replacing it can be thousands of pounds more than the car's market value.
Some insurers can just pay you the market value of the vehicle, leaving you with a shortfall to meet.
GAP insurance covers this shortfall, meaning you won't be out of pocket if an incident leaves you needing to get a new vehicle.
GAP insurance can be particularly useful for people who use finance to buy their car, as they’re still liable to repay the loan and could be out of pocket if an insurer will only refund them part of the value of the vehicle.
Our guide on GAP insurance has more information on who needs GAP insurance and how it works.