As foreshadowed in our previous e-Alerts, ASIC has today released a report following its review of the sale of add-on insurance products by car dealers. In its report, ASIC claims it has found that the ‘add-on insurance policy’ market sold through car dealers is ‘failing consumers’.
ASIC has stated in its report that consumers are being sold ‘expensive, poor value products’ and ‘products that provide very little to no benefit’ and were exposed to ‘a sales environment with pressure selling, very high commissions and conflicts of interest’.
ASIC’s report comes following two other reports about ‘add-on insurance’ released in February 2016, and an ongoing investigation by ASIC into the pricing, design and sale of add-on insurance.
ASIC’s review covered specific insurance products of 7 general insurers offered for sale through new car dealers as an add-on to a new car purchase between the 2013 and 2015 financial years. ASIC says these products make up over 90% of the insurance market. The review focused (although not exclusively) on 5 specific insurance products:
- Consumer Credit Insurance – insurance covering a consumer’s ability to make repayments (including what ASIC has described as ‘car yard life insurance’);
- Loan Termination or ‘Walkaway’ Insurance – similar to Consumer Credit Insurance but only applicable in the event that the consumer returns the car to the dealer (as opposed to keeping it);
- GAP Insurance – insurance compensating the consumer in the event of an insurance ‘write-off’ where there is a difference between the market value of the car paid out by the comprehensive insurer and the amount still owing by the consumer on their car loan at that date;
- Tyre and Rim Insurance – insurance covering the cost of repairing or replacing tyres and rims if they are damaged; and
- Mechanical breakdown Insurance – referred to by ASIC as an ‘extended warranty’ typically covering the cost of repairing or replacing parts after the manufacturer’s or dealer’s warranty has expired.
Alongside ASIC’s report and media release, ASIC have release an ‘infographic’ with several key findings arising out of the report being highlighted. Significant headlines include assertions by ASIC that:
- Car dealers received 4 times more in commission payments than there were payouts to consumers under any of the products listed above;
- Commissions to car dealers were as high as 79% of the premium paid by consumers;
- The claims ratio (the ratio of claims payouts to total premiums paid) was a very low 9%;
- Average premiums for certain insurance products exceeded the average claim payout;
- A voluntary cap on commission at 20% would reduce premiums to consumers on the products listed above of up to 70%.
ASIC has acknowledged in its report that some concerns have been raised about its methodology in calculating several of the statistics quoted in its report, but says that adjustments called for by some insurers would not resolute in a material change to the statistics or alter ASIC’s concerns about the inherent problems it has identified in the market.
ASIC’s report states that insurers who fail to address ASIC’s findings will be subject to further regulatory action by ASIC, which may include:
- taking targeted enforcement action (of an unspecified nature) against insurers or their representatives selling the products (it is unclear whether this is intended to be a reference to dealers);
- pursuing refunds to consumers who have been ‘mis-sold’ add-on insurance policies;
- publicly ‘naming and shaming’ insurers who fail to deliver significantly improved outcomes for consumers; and
- exploring law reform options to improve outcomes for consumers.
ASIC says that insurers (without specifying which ones) have so-far notified ASIC that they intend to implement a 20% cap on commissions to dealers. ASIC says that this might make the products cheaper, but that there is a long way to go to change the problems inherent in the market for add-on insurance products.
ASIC’s full report, together with its infographic, can be accessed here.
ASIC has given the sale of add-on insurance products by car dealers a significant amount of focus in 2016. Its review of the market is ongoing and does not seem to be abating with the release of this Report.