ASIC releases two reports scrutinising motor vehicle dealers' insurance product

In February 2016, ASIC released two reports entitled:

1. ‘Buying add-on insurance in car yards: Why it can be hard to say no’
2. ‘The Sale of Life Insurance Through Car Dealers: Taking Consumers For a Ride’

The reports come after an investigation by ASIC into the purchase of add-on insurance products by consumers purchasing a motor vehicle through a dealership. The second report was focused in particular on life insurance sold as part of an add-on insurance package, which ASIC calls ‘car yard life insurance’. ASIC has signalled that it will take a number of follow up actions as a result of the reports, which may have a significant impact on dealers who earn commissions on the sale of insurance and finance products.

Summary of reports

1. ASIC’s reports present a number of key findings critical of add-on, and in particular, life insurance products sold through car dealers. The reports also:

1. express concern that;
   1. dealership sales staff are given strong commission incentives to ‘up-sell’ insurance products, which are more profitable for dealerships than the primary product – the motor vehicle – being sold;
   2. this climate may lead to some sales practices which may be unfair;
2. set out that, in ASIC’s view, there is a lack transparency and training standards in the sale of life insurance products through motor vehicle dealers.

Car yard life insurance & commission

1. ASIC explains ‘car yard life insurance’ as a life insurance product that is:

1. offered to a consumer as an add-on product to the purchase of a motor vehicle;
2. bundled as an option under a car loan, which provides a payout to meet a consumer’s liability under the car loan if the consumer dies with the loan outstanding; and
3. brokered by either the car dealer or a related finance broker who, as part of a consumer’s purchase of a motor vehicle, acts as an intermediary between the consumer and the life insurer.

2. In its second report, ASIC found car yard life insurance to be characterised by:

1. relatively higher costs than similar products offered by, for example, the major banks;
2. low incidents of claim payouts relative to the premiums paid;
3. the upfront payment of premiums funded by increased borrowings by the consumer from the motor vehicle finance provider; and
4. high commissions payable to the dealers or related finance brokers.

3. On the issue of commissions, ASIC’s Report states that ASIC did not investigate the issue of commissions in detail as part of this review, but says that ASIC may do in the future.

4. However, ASIC did comment that:

1. the amount of the commission is usually based on or linked to the amount borrowed by the consumer, with any increase in the amount of credit to meet the cost of the life insurance premium also enabling the car dealer to earn a higher commission from the lender; and
2. in its view, the sales incentives and commission arrangements associated with the sale of life insurance products by or through motor vehicle dealerships contribute to poor consumer outcomes.

The key findings

1. The key findings in ASIC’s first report were that:

1. most consumers were not prepared and did not know anything about add-on insurance products before they got to the dealership;
2. by the time consumers were offered add-on insurance, they were exhausted by the purchasing process and, in some instances, felt pressured by sales staff; and
3. many consumers could not remember what products they purchased, how much they had paid or for what the products covered them.

2. The key findings in ASIC’s second report were that:

1. insurers charged consumers substantially more for car yard life insurance than for ADI-distributed life insurance;
2. most insurers charged business-use consumers more than personal-use consumers;
3. car yard life insurance is often substantially more expensive than term life insurance, even though term life insurance provides more cover;
4. single-premium policies result in poor outcomes for consumers;
5. high volumes of car yard life insurance are sold to young consumers who are unlikely to need this insurance;
6. high volumes of car yard life insurance are sold to consumers who may not have wanted the product; and
7. there are poor claim outcomes for consumers.

Follow up actions

1. ASIC says that, having regard to its findings, it will take a number of steps to ensure consumers get value from car yard life insurance, which may include:

1. encouraging insurers to review and change both the ‘design and value of car yard life insurance, including the level of supervision of their authorised representatives’;
2. monitoring the practices of individual insurers to ensure that adequate changes are made to existing products;
3. considering:
   1. taking enforcement action against individual insurers;
   2. requiring more detailed disclosure of the price of particular products;
   3. introducing additional disclosure requirements – such as the proportion of overall premiums returned in claims; and
   4. review training standards for the sale of car yard life insurance.

This article was written by Christian Teese, Associate and Evan Stents, Partner.