It emerges that those car buyers who need protection the most are missing out under the new rules for selling add-on insurance products through dealerships.
On October 5, the Australian Securities and Investments Commission (ASIC) brought in new legislation (Deferred Sales Model) which delays the finalisation of add-on insurance sales by at least four days.
This means that even if a buyer says they want the add-on insurance protection on a Monday, they cannot finalise the deal until the following Saturday (in fact five days).
The rules are intended to remove pressure selling of add-on insurance sales and to give buyers time to inform themselves whether the products suit their circumstances or not.
However, after four weeks under the new rules, it is becoming apparent that the car buyers who most need the protection covered by add-on insurances are not able to fund the premiums because the four-day delay is preventing them from including the cost of the add-on insurance in their finance package.
The consensus of the industry is that, far from protecting what ASIC saw as vulnerable consumers, the new rules are discriminating against the lower socio-economic groups of car buyers and leaving them vulnerable to the financial distress that the cover is designed to alleviate.
The CEO of AWN Insurance, Damian Chadwick, told GoAutoNews Premium: “Unfortunately we already see cases whereby consumers are voicing concerns regarding having to wait four days.
We are also having conversations with financiers concerned about the dramatic fall-off of protected loans. With inflated car prices and the challenges we all face as a result of Covid-19, the true impact of unprotected loans on consumers is yet to be understood, however, it is expected to be substantial”.
“Loan applications have now become so streamlined, that what once took days can now be achieved in hours. This is significant when you consider that for many Australians financing add-on insurance is the only viable method of obtaining protection”.
“Most consumers do not comprehend the liability they are exposed to when they finance a vehicle without warranty or loan protection. Unfortunately, if their income is impacted or the vehicle is subject to a total loss, this lack of awareness is not a financial insulation”.
Mr Chadwick said: “We work with several dealerships that have made a substantial investment in customer retention and enhanced customer service. They now find themselves in an unenviable position regarding the duty of care to their finance customers.
“Do they slow the process down to allow for the consideration and finance of add-on insurance which could result in the loss of the deal (that’s if the financier currently finances insurance) or meet the customers expectation of a swift process, understanding that many who need add-on insurance will drive into the traffic without it”.
Delayed Settlements Model
Mr Chadwick said: “In the search for a solution, we are in conversation with finance companies regarding a two-stage settlement process for vehicle loans. This process was adopted in the UK with great success. The premise of the Delayed Settlements Model sees the loan settled in two stages.
Stage 1: settlement of the vehicle which follows traditional methods; and
Stage 2:, settlement of the insurances, once the deferred sales model period is finalised”.
“This model sees the customer remain in control, with the option to either exercise stage 2 and obtain funding for insurance coverage or to choose to decline the option. If the option is declined, Stage 1 proceeds as normal.
“While it sounds like a simple solution, financiers have advised me that there are challenges with this model and that it will require some fundamental adjustments to current systems”.
Mr Chadwick said: “Given the current landscape it is apparent to me that the automotive financiers hold the keys to obtaining the balance the industry needs. And while I am not saying that other solutions are not out there, the delayed settlements model is one viable solution that can be applied swiftly”.
“As an industry, ASIC has challenged us to provide better customer outcomes and based on my conversations, most are rising to the occasion. As an industry, we have a commitment to all customers that use our products and services. However, most important are those who depend on them.
“Not enough has been said about the positive stories of insurance products working as advertised and assisting people out of situations that would otherwise be financially detrimental.
For those who struggle to get funds together for a vehicle deposit or are dealing with negative equity, add-on insurance is not a luxury, it’s a necessity”.
Mr Chadwick said that it was “in the interests of the finance companies to assist the add-on insurance industry to protect borrowers from the financial stress of mechanical failures, total losses and unexpected negative changes to the family budget.
“The unfortunate reality is the people who need the protection of add-on insurance the most, are those dependent on finance and not normally in a position to command a competitive rate”.
“Nobody benefits if the vehicle stops working, the customer stops paying, and the downward spiral commences.
“For many of us, ownership of a vehicle is part of day-to-day life and provides access to or may even be the focus of our work/income. No one can predict an accident and today’s vehicles are complex machines with thousands of parts, so a breakdown is inevitable during the life of ownership”.
“A Caffe Latte Grande at my local coffee shop will set you back about $5.50. For the same cost as one of those a week you could cover most standard vehicles with warranty coverage for mechanical and electrical cover (as per the manufacturers) for 36 months. For the cost of two Caffe Latte Grande per week, you can also have Asset Protection Insurance (with no GAP cover) and Roadside assistance.
“The deferred sales model allows people to choose if add-on insurance is right for them and gives them the power to say no if it isn’t. Just as important, financiers introducing a delayed settlements model would allow those who say yes to add-on insurance, a viable way to insulate against uncertain future liability,” Mr Chadwick said.
By John Mellor