ASIC has told insurers they need to address ‘serious problems’ regarding the sale of add-on insurance policies through car Dealers.

ASIC conducted a three-year review of this area and ASIC Deputy Chairman Peter Kell said insurers needed to “immediately and comprehensibly” address “serious problems in the market”.

“ASIC will be undertaking further work, including potential enforcement action, to ensure that this market delivers acceptable outcomes for consumers,” Mr Kell said.
“We will also be looking at how insurers can refund consumers who have been sold inappropriate products.”

ASIC’s media release of 12 September 2016 stated that ASIC is putting general insurers on notice that they need to improve consumer outcomes by making substantial changes to the pricing, design and sale of add-on insurance products or face additional regulatory action.

The key commitments ASIC are seeking from insurers are:

• A significant reduction in the amount of commissions paid to anyone who on-sells an add-on insurance product through car Dealers
• A significant improvement in the value offered by these products, through substantial reductions in price and better product design and cover
• A move away from single upfront premiums that are financed through the loan contract, given the adverse financial impact this has on consumers
• Providing refunds to consumers who have been sold policies in circumstances that were unfair, such as where a policy has been sold to a consumer who was never eligible to claim under the policy.

Insurers have notified ASIC that they intend to implement a 20 per cent cap on commissions and also provide ASIC on a regular basis with data on prices, premiums and claims so that ASIC can monitor the impact of changes on consumers.

The add-on insurance products reviewed by ASIC include:

• Consumer credit insurance – insures a consumer’s capacity to make repayments under a credit contract, including insurance against the sickness, injury, disability, death or unemployment of the consumer.
• Loan termination insurance or ‘Walkaway’ insurance. This is similar to CCI but is more restrictive, as the main benefit is payable only if the consumer returns the car to the Dealer. It means the insurance doesn’t help the consumer keep the car if they become disabled or sick.
• GAP insurance – provides cover for the difference between what a consumer owes on the car loan and the market value paid out under their comprehensive car insurance, if they write off their car.
  Tyre and rim insurance – provides cover for the cost of repairing or replacing tyres and rims if they are damaged as a result of blowouts, punctures or other road damage.
• Mechanical breakdown insurance – often referred to as extended warranty. This typically covers the cost of repairing or replacing parts of the car as a result of mechanical failures after the manufacturer’s warranty has expired.

AADA welcomes any initiatives that provide improved regulatory transparency and clarity and is concerned about the highly selective approach adopted towards the Dealers by ASIC. Motor vehicle Dealers sell insurance products created by the insurance industry at premiums nominated by the insurers on the relevant rate cards.

AADA CEO David Blackhall stated that our members believe 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 is concerning for our members.

At no time during the ASIC review was AADA invited to discuss or make a submission on the issues raised in ASIC Report 492 released on 12 September 2016.

The limitation of commissions to 20 per cent will result in reduced income to dealerships and the definition of ‘commission’ is one issue that AADA is concerned about. Dealerships provide facilities, staff and training to enable insurers to sell their products, as well as ancillary services, at the time of sale of a motor vehicle. Reimbursement of these actual expenses should not be subject to a 20 per cent limitation.

There is also the question of whether the removal of ‘reverse competition’ will result in lower premiums to consumers, which may lead to the increase in the price of a motor vehicle and affect the sustainability of dealership operations.

AADA has asked for a meeting with ASIC to gain a better understanding of the issues raised in their report.