The Australian Securities and Investment Commission (ASIC) has warned that insurers need to improve consumer outcomes by making substantial changes to the pricing, design and sale of add-on insurance products sold through car dealers or they risked additional regulatory action.
After reviewing the sale of add-on general insurance policies, ASIC concluded that the market was failing consumers as they were offered “expensive, poor value product” which provided consumers very little to no benefit.
Additionally, insurers created a sales environment with pressure selling, very high commissions and conflicts of interest.
The majority of these products were being sold to consumers when they were purchasing a new or used car and to cover risks relating to the car or relating to the loan that the consumers were about to take out to buy a car, with examples including consumer credit insurance and tyre rim insurance.
Additionally, ASIC found that consumers obtained little financial benefit from buying add-on insurance and they paid $1.6 billion in premiums while receiving only $144 million in successful insurance claims, which represented a very low claims payout of nine per cent.
At the same time, car dealers earned $602 million in commissions which was over four times more than consumers received in claims and payments for these insurance products, and were often packaged into the consumer’s car loan as a single upfront premium.
ASIC decided to put general insurers on notice and is currently seeking the following commitments from insurers:
- A significant reduction in the amount of commissions paid to anyone who sells an adds-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; and
- Providing refunds to consumers who have been sold policies in circumstances that was unfair, such as where a policy has been sold to a consumer who was never eligible to claim under the policy.
Insurers have already notified ASIC that they intend to implement a 20 per cent cap on commissions and will be providing the regulator with data on prices, premiums, and claims to help monitor the impact of changes on consumers.
ASIC’s 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 reviewed seven general insurers, who made up over 90 per cent of the car add-on insurance market, to obtain detailed data about their products. These insurers included Aioi Nissay Dowa Insurance Company Australia, Allianz Australia Insurance Limited, Eric Insurance Limited, Swann Insurance, MTA Insurance Limited, NM Insurance Pty Ltd and QBE Insurance.
The report followed two other reports in February about the sale of add-on life insurance by car dealers where the regulator stressed that the insurers needed to address the high costs, poor value, and poor claims of life insurance products sold this way.
