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JUST eight months into the infamous Deferred Sales Model (DSM) which imposes, in effect, a five-day delay on the sales of add-on insurance products, it is becoming clear that the move by the regulator has just about wiped out the sales of add-on insurance protection for car buyers from within the dealership.

The DSM is the brainchild of the Australian Securities and Investments Commission (ASIC). It has imposed a five-day circuit breaker between the time a dealer sells a car and the time the dealer is allowed to attempt to sell add-on insurance. 

In addition, there is quite onerous compliance, and this has meant many product providers have taken the view that the risk of getting it wrong and facing the wrath of ASIC investigators justifies leaving the industry or removing products from sale. 

The aim of the legislation is to prevent dealer business managers from using the momentum and excitement of the sale of the car and what was perceived to be pressure selling, to build extra insurance-related add-on sales into the deal, a cost commonly built into the finance.

The regulator took the view that these products were overpriced with little or no value; however, has the  DSM gone too far? For those providers that remain, the industry reports that in some cases general insurance sales have fallen by as much as 90 per cent since the legislation was introduced 5th October 2021.

However, the good news is that close scrutiny of the regulation reveals that some warranty products fall outside the remit of the DSM and can still be sold by dealers.

Damian Chadwick

The DSM governs a class of products that meet the test of “contracts of insurance” or general insurance products. This class is broad and includes products like home and content, pet insurance, mechanical breakdown insurance, Gap and CCI; all are captured by the DSM. 

So, what products don’t fall within the DSM? Based on a review of RG275, it would appear that a class of warranty products (discretionary risk products and dealer service contracts) currently do not meet the “contracts of insurance” test and therefore are not part of the DSM.    

Discretionary risk products very much look, feel and present similar to an insurance product, however, there are subtle differences, one being a discretionary risk clause, which basically says that the product provider pays a claim at its discretion. Without underwriting and with this clause applied, this product is a financial services product, not general insurance.

Dealer service contracts give the dealer the ability to provide incidental coverage under the Corporations Act. Under fixed guidelines, the dealer can provide certain guarantees at the time of selling a vehicle that is not general insurance and therefore does not fall under the DSM.

Most commonly, dealers rely on an administrator to ensure that their products meet the legislation and are given or sold as per the guidelines. This is a little more straightforward when the products are given away to encourage service retention; however, it becomes a little more tricky when they are sold.  Administration companies such as Harrier and Kacare provide such services however, Kacare goes one step further and allows the dealer to reinsure the liability.

Asked by GoAutoNews Premium for a report card on the effects of the DSM on the industry, Damian Chadwick, CEO of AWN Insurance said: “almost eight months into the new legislation and the change to the automotive landscape has been devastating for general insurance. 

The add-on insurance side of the business has dropped significantly, and my understanding is that for some providers, the drop is more than 90 per cent.

“Consumers don’t want to delay buying their vehicle by five days, so business managers and finance brokers have no choice other than to have customers leave unprotected. It’s not an enviable position or one we take likely; however, it’s the one we find ourselves in.”

“Feedback from our dealers is the DSM process is not working, and they highlight two key issues as the catalyst: 

  • The challenge of re engagement with customers after the sale 
  • Poor funding options for insurance outside of traditional vehicle finance.

“While five days does not sound long, for most people the pause is enough to consider the transaction closed. And for those finance companies that still support add-on insurance, there are the challenges of adding a second transaction to the primary agreement once it has settled. 

“The outcome is that most have given up on add-on insurance and put it in the too hard basket.”

But, Mr Chadwick said, for those who care to look, there are still pockets of opportunity when selecting the right products. 

“Even the sale of add-on insurance can be viable with adjustments to process and an adjusted introduction. 

“At first glance, the legislation is complex, and the fear of a legislation breach has paralyzed many in the industry. However, once some key principles are understood, it becomes apparent that there are some pockets of light that allow dealers to transact under certain conditions, using the correct products.

“When used individually, insurance, service contracts and discretionary risk products have always left gaps in the dealerships program so you had to use multiple suppliers or let some opportunities fall to the wayside. For the last eight month’s our administration company Kacare has blended the benefits of each product type into one easy to use program via one system. 

“The program is fully customisable and benefits each department within the dealership, meaning sales, finance, aftermarket, service, and parts all have a stake in the outcome. Our aim is to deliver bespoke systems and services and work with the dealership to create their own unique offering.

Mr Chadwick said that his company has partnered with Adam Bird of Professional Sales Training Solutions “to ensure that our agents receive continuous sales training and mentoring”. 

“Adam understands the challenges and is the perfect fit for this program.”

“AWN Insurance and Kacare are here to support the motor industry that has supported us for the last 30 years. The DSM has created a paradigm shift, so we have responded by changing our thinking and finding the solutions our agents need,” Mr Chadwick said.

By John Mellor

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