ASIC has reviewed the sale of add-on general insurance policies through car dealers and found that the market is failing consumers.
Our report released today (REP 492) 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 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,' said Mr Kell.
For the three year period that we reviewed, we 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 per cent
- 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 we are seeking 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 per cent 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 Deputy Chairman Peter Kell said, 'While we welcome the initial steps taken by the insurers to improve the value of these products for consumers, there is still a long way to go. If industry does not deliver swift improvements for consumers, ASIC will take further action, including enforcement action where appropriate.'
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.
- Report 492
- Infographic - car dealers' commissions vs successful consumer claims
- Listen to the ASIC podcast
What not to buy
This new MoneySmart infographic shows why you shouldn't buy mechanical breakdown insurance when you purchase a car.
ASIC reviewed seven general insurers, estimated to make up over 90 per cent of the car dealer add-on insurance market, and obtained detailed data about the way these products operate. The seven insurers are:
- Aioi Nissay Dowa Insurance Company Australia Pty Ltd
- Allianz Australia Insurance Limited
- Eric Insurance Limited (formerly known as AVEA Insurance Limited)
- Swann Insurance (Aust) Pty Ltd, part of Insurance Australia Group Limited
- MTA Insurance Limited, part of Suncorp Group Limited
- NM Insurance Pty Ltd (acting as agent for AAI Limited)
- QBE Insurance (Australia) Limited
ASIC reviewed five add-on insurance products which are commonly sold by car dealers:
- Consumer credit insurance - insures a consumer's capacity to make repayments under a credit contract, including insurance against the sickness, injury, disability, death or unemployment of the consumer
- Loan termination insurance or 'Walkaway' insurance - this is similar to CCI , but is more restrictive as the main benefit is payable only if the consumer returns the car to the dealer - it means the insurance doesn't help the consumer keep the car if they become disabled or sick
- GAP insurance - provides cover for the difference between what a consumer owes on their car loan, and the market value paid out under their comprehensive car insurance, if they write off their car
- Tyre and rim insurance - provides cover for the cost of repairing or replacing tyres and rims if they are damaged as a result of blowouts, punctures or other road damage
- Mechanical breakdown insurance - often referred to as an extended warranty. This typically covers the cost of repairing or replacing parts of the car as a result of mechanical failures after the manufacturer's or dealer's warranty has expired
This report follows two other reports about add-on insurance released in February this year - REP 471 The sale of life insurance through car dealers: Taking consumers for a ride and REP 470 Buying add-on insurance in car yards: Why it can be hard to say no.
As a result of ASIC's work in this area to date, all insurers have changed the pricing of consumer credit insurance so that small business customers are no longer charged more than personal use consumers for the same product.
For consumers who are buying a car, ASIC's MoneySmart website contains useful and unbiased information. Consumers can also download the MoneySmart Cars app, which helps consumers understand the true cost of car ownership and what to look out for.