The comments follow the release of a report by ASIC which showed that claims on many insurance products like tyre and rim insurance and GAP insurance were only a very small proportion of the premium charged. The report was also critical of the commissions paid for selling the insurance products.
The report has been criticised by the Australian Automotive Dealer Association (AADA) for singling out car retailers from a much wider group of businesses selling these types of products, and there is a feeling by dealers that they have been ambushed by the regulator which is also dealing with the all-important issue of flex commissions on car finance deals.
The key to the report is not so much the criticism contained in it but exactly what ASIC could do about it.
Asked what specific enforcement action ASIC would take against dealers if they did not bend to the thrust of the report, an ASIC spokesperson told GoAutoNews Premium: “If industry does not deliver swift improvements for consumers, ASIC will take further action.
“Everything is on the table, including enforcement action where appropriate.
“That may include, but is not limited to, civil action for misleading and deceptive conduct.”
ASIC is clearly trying to encourage industry led changes and would almost certainly resort to civil action on a case-by-case basis only – though the consequences of such a case could be severe if proven.
A pecuniary penalty can be up to $200,000 for individuals. But any changes to the law applicable to insurance sales and commissions would be a matter for government.
Finance and insurance (F&I) sales are an important part of car dealership profitability.
According to a Deloitte presentation to last week’s AADA conference in Melbourne, a five per cent drop in F&I revenue would result in the ratio of unprofitable car dealerships in Australia increasing from one-in-four to one-in-three.
The ASIC report released this week makes several claims in regard to so called add-on insurance policies sold by car dealers. The report, number 492, used data covering the past three years gathered from seven major insurers covering 90% of the market.
According to the ASIC report, “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”.
ASIC’s findings include:
- Consumers paid $1.6 billion in premiums and received only $144 million in successful insurance claims
- Some major add-on products had even less benefit to consumers 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
According to ASIC Deputy Chairman Peter Kell, “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,” he said.
In a particular instance cited by Mr Kell, the insurer’s policy would pay a maximum $6000 in the event that the customer became unemployed. The premium was $3746 and the interest applicable to this sum was $2762, adding up to a total cost of $6408 – some $408 more than could possibly be paid out.
ASIC is seeking several commitments from the insurance industry including:
- A significant reduction in the amount of commissions paid to anyone who sells an add-on insurance product through car dealers
- A large 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
- The provision of 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
GoAutoNews Premium understands that insurers have notified ASIC that they intend to implement a 20 per cent cap on commissions.
The fat fee five
Five add-on insurance products were covered by the ASIC report:
- Consumer credit insurance (CCI) – insures a borrower’s capacity to make repayments under a car loan, including insurance against sickness, injury, disability, death or unemployment.
- Guaranteed asset protection (GAP) – insurance that covers the difference between what a customer owes on their car loan and any amount they may receive under their comprehensive insurance policy, if the car is a total loss.
- Loan termination insurance – insurance covering the difference between what a consumer owes on their car loan and the market value of the car if they return it because they cannot make repayments due to illness or injury.
- Tyre and rim insurance – underwrites the cost of repairing or replacing damaged tyres and rims from blowouts, punctures or other road damage.
Mechanical breakdown insurance – better known as an extended warranty, which mitigates the cost of repairing or replacing parts of the car due to mechanical failure after the manufacturer’s or dealer’s warranty has expired.
According to ASIC some 75% of distribution by dollar value for these products was through car dealers, suggesting that the demand for these products is driven by the car dealers. ASIC’s logic is that if there was a broad consumer demand for these products, it is likely they would be more broadly available.
The magnificent seven
Data from seven insurance companies estimated to cover 90% of the market was gathered by ASIC:
- Aioi Nissay Dowa Insurance Company Australia Pty Ltd (the underwriter of Toyota Finance)
- 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 AAI Limited, which is part of Suncorp Group Limited)
- NM Insurance Pty Ltd (acting as agent for AAI Limited
- QBE Insurance (Australia) Limited
By Daniel Cotterill
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