ASIC is taking a closer look at potential consumer harm that may come with the add-on financial products that are sold with cars.
Earlier this week the Australian Securities and Investments Commission (ASIC) announced that it was consulting the add on financial products that come with cars.
“There has been a history of unfair conduct and poor results for consumers in the add-on insurance market. We have seen policies sold to consumers when they have been ineligible to claim under them. ASIC has secured over $130 million in refunds to compensate consumers for their losses from these practices,” Commissioner Sean Hughes said in a formal statement earlier this week.
The areas of focus for product intervention: the sale of add-on financial products through car yard intermediaries:
introducing a deferred sales model—applying a deferred sales model to sales of add-on insurance products and warranties by car yards, other than comprehensive or compulsory third party (CTP) insurance, and manufacturers’ warranties provided with new cars. This would apply to all sales where finance is arranged for motor vehicles, including by car dealers, finance brokers, and salary packaging firms.
Complementing the deferred sales model with additional obligations—this would include other requirements such as:
the use of ‘knock out’ questions to prohibit sales where the product has low or no value; and
prohibiting the sale of warranties that provide low levels of cover (where the maximum amount that can be claimed is $2000 or less).
Monitoring the impact of these proposals—If we make an intervention order we propose to collect data from insurers and warranty providers so that we can monitor whether the interventions are operating as intended.
In 2016, the conduct regulator presented its findings around the add-on insurance which found that that products sold through the distribution channel might not be meeting consumer needs.
The report titled; The Market is failing consumers: The sale of add-on insurance through car dealers.
The review that they did for the 2016 report considers a three-year period found that:
Consumers obtained little financial benefit from buying add-on insurance, with consumers paying $1.6 billion in premiums and receiving only $144 million in successful insurance claims - representing a very low claims payout of nine per cent. For some major add-on products, the benefit to consumers was even lower, 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
Payment for these insurance products is commonly packaged into the consumer's car loan as a single upfront premium. This can substantially increase the cost of the product by increasing the loan amount and interest paid. Research shows that consumers are often unaware that they even have the policy when it is paid upfront as a single premium, and they may not get a premium refund if they repay their car loan early. Policies have been sold where it is impossible for the consumer to receive a claim payout that is greater than the cost of the insurance
The car sales environment inhibits good decision making about these products because of the conflicts of interest and pressure sales built into the distribution model. The consumer is focussed on purchasing a car and financing that purchase - not on the details of the complex insurance policy
At the time the then Deputy commissioner Peter Kell said in an official statement that, “ASIC will be undertaking further work, including potential enforcement action, to ensure that this market delivers acceptable outcomes for consumers. We will also be looking at how insurers can refund consumers who have been sold inappropriate products.”
Since then ASIC has had a resources boost and has been invested with new powers like the product intervention power.
The recently released the consultation paper also makes mention of the Buying add-on insurance in car yards: why it can be hard to say no and the sale of life insurance through car dealers: Taking consumers for a ride.
Recently, the government published proposal reforms to the sale of the add-on insurance products which would try to meet the recommendations that have been made by the royal commission.
It is here that they address the issue of the deferred sales model. the government writes in the report:
It is proposed for the deferred sales model to apply to those insurance products that are offered or sold at the same time as when a consumer purchases the primary product or acquires finance for which the insurance covers associated risks.
One of the proposals that the government highlights in their report are to give the corporate regulator power to regulate risk management products as add-on insurance even though they are different.
Per the report:
This would help to ensure competitive neutrality between AFSL-holders who issue risk management products.
The consultation will open for the responses until 12 November.