The Financial Conduct Authority (FCA) today said that several insurance firms have agreed to pause selling GAP insurance, formally known as 'Guaranteed Asset Protection'.
GAP insurance covers a car's loss in value if it is written off or stolen, as vehicles often depreciate quickly.
It is usually sold as a standalone policy or as an add-on to other sorts of financial deals, like car insurance.
But the GAP insurance market has been dogged by controversy, as the FCA has been investigating over concerns that hardly any policies are ever claimed on.
This is Money has previously reported that the average GAP insurance policyholder claims just once every 300 years.
Now the regulator said 80 per cent of the GAP insurance market has agreed to stop selling new policies.
The FCA said: 'The FCA is concerned that the product is failing to provide fair value to some consumers.'
The regulator will now speak to GAP insurers 'with the aim of improving the value of the product across all firms', the FCA said today.
Consumers will still be able to buy GAP insurance, but may need to find it from a specialist that is still allowed to sell it.
In September, the FCA wrote to firms selling GAP insurance asking them to prove customers were getting a fair deal.
But the regulator was unimpressed with the responses and asked affected firms to change their insurance deals to give better value to customers.
The FCA previously found that only 6 per cent of the amount customers pay in premiums for GAP insurance is paid out in claims.
For comparison, motor insurers pay out 64.51 per cent of premiums as claims and motorbike insurers 60.67 per cent.
The FCA has also seen examples of some firms paying out 70 per cent of the value of insurance premiums in commission to parties involved in selling GAP policies, such as car dealerships.
FCA executive director of consumers and competition Sheldon Mills said: 'I welcome the agreement by firms providing GAP insurance to pause sales while they work on improving value for customers.
'GAP insurance can provide a useful service to customers, but in its current form it does not offer fair value and we want to see improvements.
'We will continue to work closely with firms as we carry out further engagement to resolve these issues and ensure customers are getting fair value products that meet their needs.'
Why don't drivers claim on GAP insurance?
Some may not be aware they even have this insurance.
When this insurance is sold, especially as an add-on to a bigger main policy, customers frequently do not realise - or forget - that they have the cover at all.
When GAP insurance is claimed on it almost always pays out, suggesting many customers are unaware they are covered in the first place.
In fact, standalone GAP insurance has the highest payout rate of any insurance, at 99.3 per cent, with an average claim of £529.86 - when customers actually make a claim.
That drops to 95.59 per cent for add-on GAP, with a standard claim being £2,201.