ASIC has reviewed the sale of add-on general insurance policies through car dealers and found that the market is failing consumers.
ASIC’s report finds that consumers are being sold expensive, poor value products; products that provide consumers very little to no benefit; and a sales environment with pressure selling, very high commissions and conflicts of interest.
These products are sold to consumers when they purchase a new or used car, and cover risks relating to the car itself or relating to the loan that the consumer takes out to purchase the car. Examples include consumer credit insurance and tyre and rim insurance.
ASIC Deputy Chairman Peter Kell
ASIC Deputy Chairman Peter Kell said:
There are serious problems in this market that need to be immediately and comprehensively addressed by insurers.
ASIC will be undertaking further work, including potential enforcement action, to ensure that this market delivers acceptable outcomes for consumers. We will also be looking at how insurers can refund consumers who have been sold inappropriate products.”
For the three year period that ASIC reviewed, the commission have found that:
- Consumers obtained little financial benefit from buying add-on insurance, with consumers paying $1.6 billion in premiums and receiving only $144 million in successful insurance claims – representing a very low claims payout of nine per cent. For some major add-on products, the benefit to consumers was even lower, with consumer credit insurance claims payouts representing just five cents for each dollar of premium
- Car dealers earned $602 million in commissions – over four times more than consumers received in claims, with commissions paid to car dealers as high as 79%
- Payment for these insurance products is commonly packaged into the consumer’s car loan as a single upfront premium. This can substantially increase the cost of the product by increasing the loan amount and interest paid. Research shows that consumers are often unaware that they even have the policy when it is paid upfront as a single premium, and they may not get a premium refund if they repay their car loan early. Policies have been sold where it is impossible for the consumer to receive a claim payout that is greater than the cost of the insurance
- The car sales environment inhibits good decision making about these products because of the conflicts of interest and pressure sales built into the distribution model. The consumer is focussed on purchasing a car and financing that purchase – not on the details of the complex insurance policy
Today’s report follows ASIC’s release of two reports in February this year about the sale of add-on life insurance by car dealers. ASIC stressed the need for insurers to address the high costs, poor value and poor claim outcomes of life insurance products sold this way.
ASIC is putting general insurers on notice that they need to improve consumer outcomes by making substantial changes to the pricing, design and sale of add-on insurance products or face additional regulatory action. The key commitments sought from insurers are:
- A significant reduction in the amount of commissions paid to anyone who sells an add-on insurance product through car dealers
- A significant improvement in the value offered by these products, through substantial reductions in price and better product design and cover
- A move away from single upfront premiums that are financed through the loan contract, given the adverse financial impact this has on consumers
- Providing refunds to consumers who have been sold policies in circumstances that were unfair, such as where a policy has been sold to a consumer who was never eligible to claim under the policy
Insurers have notified ASIC that they intend to implement a 20% cap on commissions, which is a positive step. Insurers in this market will be also providing ASIC with data on prices, premiums and claims on a regular basis so that we can monitor the impact of changes on consumers.
ASIC’s review of these products is ongoing. ASIC will continue to work with insurers and consumer representatives to ensure that proposals for change deliver significantly improved value to consumers.