The call has been made by leading Australian auto insurance provider AWN Group (AWN) as part of an ongoing campaign by AWN Insurance and its recently-purchased Sovereign Insurance Australia to develop ways to reduce the exposure of vehicle buyers to financial hardship. 

Damian Chadwick, director AWN and CEO of Sovereign, told GoAutoNews Premium that on the eve of the AADA Convention, he was keen to start a discussion on ways to insulate car buyers and financiers from an increasingly volatile economy.

He said that while financiers should be held to high standards when assessing consumer loans, the current economic climate made it nearly impossible to predict the stability of a consumer’s financial position in the longer term.

He said that a growing trend towards seven-year loans would only compound this issue.

Damian Chadwick

“A consumer looking to buy a car today, with a suitable deposit and who can demonstrate the capacity to make repayments, is likely to get a loan (other factors notwithstanding). 

“However, if economists and world leaders are uncertain about the economy in the medium to long term, how realistic is it to assume financiers can see your financial future seven years from now in their crystal ball? 

“In addition to individual events that can turn a consumer’s finances upside down (like injury, job loss, divorce), we have global events (like war, pandemics and destabilising superpowers) that have and will continue to impact our economy. In such an unpredictable market, what can be considered responsible lending?

As an industry, no one wants to see loans with eye-watering rates and impossible criteria; but this could be where we are headed. We have had 400 basis point rate increases since May 2022, pushing borrowing costs to their highest level since April 2012, and the RBA is keeping options open for further increases before the end of the year.

Mr Chadwick said that home lenders utilisation of insurance was well documented and “very sensible” because it protects both the customer and the institution from unexpected adversity. It is not uncommon for some institutions to insure all their loans, and nearly all will engage in insurance if a suitable deposit is not in place.

“Insurance places another layer of consumer protection because you now have a regulated  third party with stringent capital requirements mitigating the consumer and financer against the unforeseen. 

“This is what insurance policies are set out to do, to cover unlikely but foreseeable risks. So why is this obvious solution being overlooked?

“The unfortunate reality is that in the next 12 to 18 months, many consumers, through no fault of their own, could find themselves in hardship. They have taken on obligations (credit) in good faith, with every intention to meet those obligations. However, an economic storm is approaching that will see many Australians struggle with fuel prices, power bills, mortgage repayments and grocery bills.

“If we stand back and do nothing, the market will slow as rates continue to climb and consumer appetites and disposable income diminish. 

“Many Australians will soon be hit with substantial rent or mortgage payment increases as thousands of fixed-rate loans become variable. Loans will become increasingly difficult to obtain as the criteria escalates and the quality of the applicant deteriorates (defaults, bankruptcy, low income). 

“Of course, we can wait for advocacy groups and regulators to step in with retrospective statements highlighting the industry’s short-sighted approach and profit-first mindset; and brace for the impact of regulatory reforms (have we already forgotten the DSM?). 

“Or, as an industry, we can learn from past mistakes and seek to take proactive measures. 

“I am keen to engage with finance and dealer groups to discuss proactive steps to insulate against what many agree will be a challenging environment. I am proposing initiatives such as: 

• Increased training for business managers who have never experienced this type of environment and lack the experience to guide the customer to an appropriate outcome 
• Introducing complimentary insurance products that generate no financial reward, but, protect consumers against volatility and create an increased number of finance opportunities
• Back trading programs that facilitate a viable method of reducing a consumer’s repayments if their income is impacted by future events 
• And, similar to mortgage insurance, a requirement for insurance if criteria such as sufficient deposit cannot be obtained and the utilisation of a GFV as a preference to an extended seven-year loan.

“I have no doubts that similar conversations are being held in boardrooms across Australia and that I am not the only one who can see events unfolding. In my opinion, doing nothing is not an acceptable outcome. I seek to open dialogue with those wishing to improve consumer outcomes.”

Mr Chadwick said in most cases, for less than a cup of coffee a month, a consumer and finance company could be insulated from the financial loss brought about by a consumer’s involuntary inability to meet repayments.

“It just doesn’t make sense to me that insurance is not seen as a possible solution,” Mr Chadwick said.

“I think it’s an interesting conversation that needs to take place. This is really about getting viable solutions out there and having people consider all options.

“What I am suggesting today is that there’s more to be had, by collaboration and conversation between the finance industry and the insurance industry to see if there is a more suitable solution for the Australian public and to give further support to the automotive industry,” Mr Chadwick said.

By John Mellor