Rod Sims

UPDATE March 9

The Australian Competition and Consumer Commission today passed final judgement on the contentious commission cap on add-on insurance proposed by 16 insurers by officially denying the practice.

By refusing to allow the 20 per cent cap on insurance products sold through car dealers, the ACCC said it had removed the chance that consumers would be sold products they may not need and prevented a reduction in competition between insurance companies.

“The ACCC is denying authorisation because we believe this proposal is unlikely to change sales incentives or the quality of products, and consumers will still be sold products without being given adequate information or opportunity to make a considered decision,” ACCC chairman Rod Sims said today.

“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 is also concerned that these arrangements, if implemented, could significantly delay the development of more effective solutions to the problems that ASIC has identified.”

The ACCC last month issued a draft ruling that extinguished plans by 16 insurance companies to find a level ground and cap commissions at 20 per cent. It based its interim decision on its long-running concerns that car retailers were selling products the consumer did not need.

In its statement made on February 17, the ACCC said that consumers were being sold expensive products that often provide little to no benefit.

“At the point of sale the consumer is focused on the purchase of a vehicle, not insurance, and the sales environment involves high-pressure selling tactics, a lack of adequate information, very high commissions, and conflicts of interest,” it said.

It pointed to the September 2016 report by the Australian Securities and Investments Commission (ASIC) that singled out the car retailing industry.

In his statement last month, ACCC chairman Rod Sims said: “The factors identified in ASIC’s report mean that consumers are often unable to make optimal, well-informed choices when buying add-on insurance products when buying a car from a dealer.”

“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.

“The ACCC considers that the proposed cap is unlikely to result in a public benefit.”

Mr Sims said that 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 is also concerned that these arrangements, if implemented, could significantly delay the development of more effective solutions to the problems that ASIC has identified,” Mr Sims said.

GoAutoNews Premium reported in September 2016 that the Australian Automotive Dealer Association (AADA) had questioned the commission’s “highly selective approach”.

David Blackhall

AADA CEO David Blackhall said: “Our members believe that sound regulatory frameworks require consistency, equity and fairness across all products and channels within a particular sector – in this case the insurance industry.

“The singling out of some point-of-sale ‘add on’ products and the exclusion of others – for example comprehensive insurance – is concerning for our members,” he said.

GoAutoNews Premium has independently found that the government agency responsible for insurance matters, the Australian Prudential Regulation Authority (APRA), regularly produces reports on insurance matters, including add-on insurance products that are the subject of ASIC’s report.

APRA’s data on insurance products, on its website, includes all insurance products that have add-on policies at the point of sale.

These include motor vehicle comprehensive insurance that is not considered in ASIC’s report on car dealers. Yet both are charged to the consumer in an identical manner.

GoAutoNews Premium concluded that ASIC did not consult APRA to gain full details of the insurance industry and the frequent use in other sectors of add-on insurance charged at the point of sale.

In response, the AADA said it was concerned that ASIC may not have taken all factors into account when making decisions about the car retail industry.

“Our members consider that they have always complied with the regulatory requirements imposed by ASIC, APRA and ACCC in all aspects of their business operations, including the sale of insurance products,” Mr Blackhall said last year.

“Motor dealers sell insurance products created by the insurance industry at premiums nominated by the insurers on the relevant rate cards.”

Mr Blackhall said he was also disappointed at the low level of direct dealer consultation from ASIC during the three-year study.

“This lack of engagement stands in direct contrast with ASIC’s handling of other important matters impacting franchised car dealers,” he said.

The investigation by ASIC and the ACCC was into add-on insurance products that may be sold to consumers when buying a new or used vehicle.

The ACCC said that the add-on insurance may be connected to finance associated with the motor vehicle such as consumer credit insurance, gap insurance, walk away insurance, and trauma insurance.

“Alternatively, it may relate to the vehicle itself, such as comprehensive insurance, extended warranty insurance, or tyre and rim insurance,” it said.

Click here for updated AADA Comment on this issue.

By Neil Dowling