Capping commissions doesn’t work says ACCC

Insurance companies capping commissions does not represent an effective remedy, according to the Australian Competition and Consumer Commission (ACCC).

While the capping of commissions has represented an underpinning of the Life Insurance Framework (LIF), risk advisers are pointing to a recent ACCC determination dealing with the sale of add-on insurance by car dealers in which the regulator has dismissed such a strategy as not addressing the primary issues.

Indeed, the ACCC determination has declared that such a capping of commissions served the best interests of the insurance companies rather than the car dealerships and provided minimal benefit to consumers.

In doing so, the ACCC rejected an application by the insurers for such a cap stating in its determination that: “At the outset, the ACCC notes that a collective agreement between insurers to cap the commissions that they pay to car dealerships will primarily benefit insurers at the expense of car dealerships, and provide minimal if any benefit for consumers”.

In a statement accompanying the determination, ACCC chairman, Rod Sims acknowledged the adverse findings of the Australian Securities and Investments Commission (ASIC) with respect to add-on insurance but stated: “A cap on commissions does not address these issues and will not remove the opportunity and incentive for insurers and dealerships to sell consumers expensive, poor value products”.

“This proposal doesn’t help to create an environment where consumers are in control and can benefit from effective competition. It is unlikely to address these market failures or improve the industry for consumers,” he said. 

“The ACCC considers that the proposed cap is unlikely to result in a public benefit. While insurers would benefit from a cap at the expense of car dealers, this conduct is likely to lessen competition between insurers, including by creating greater opportunities for explicit or tacit collusion and greater shared knowledge between insurers of competitors’ costs.” 

The ACCC chairman’s statement said the regulator was also concerned that the arrangements, if implemented, “could significantly delay the development of more effective solutions to the problems that ASIC has identified”.

The formal ACCC determination stated:

The ACCC considers the following public detriments are likely to arise from the conduct:

•  Reduction in competition between insurers, including greater opportunities for explicit or tacit collusion and greater shared knowledge between insurers of competitors’ costs;
• The likelihood that the 20 per cent commission cap becomes a de facto industry standard rate of commission; and
• Delayed implementation of effective reforms which properly address the market failures that have resulted in the consumer protection issues identified by ASIC.