The Australian Securities and Investments Commission (ASIC) has warned that it could take action to restrict and more closely monitor the practice of Automotive Dealers selling or brokering insurance products as part of motor vehicle sales.
ASIC’s warning comes as part of two reports it released in February, following an investigation into the purchase of add-on insurance products as part of a motor vehicle purchase.
The reports express ASIC’s concern that dealership sales staff are given strong commission incentives to ‘up-sell’ insurance products, which make insurance products more profitable for dealerships than the primary product – the motor vehicle – being sold.
ASIC alleges that these commission incentives, along with a lack of transparency and training standards in the sale of life insurance products, may lead to a climate in which Dealers engage (whether deliberately or unintentionally) in unfair sales practices and which contributes to poor consumer outcomes.
Car yard life insurance and commission
ASIC was particularly critical of the insurance product it called ‘car yard life insurance’. This is where a life insurance product – brokered by either the Dealer or a related finance broker – is offered to a consumer as an add-on product to a financed motor vehicle sale, to give a payout that meets a customer’s liability under a car loan if the customer dies with the car loan outstanding,
In its second report ASIC found car yard life insurance to be characterised by:
- relatively higher costs than similar products offered by, for example, the major banks
- low incidents of claim payouts relative to the premiums paid
- the up-front payment of premiums funded by increased borrowings by the consumer from the motor vehicle finance provider, and
- high commissions payable to the dealers or related finance brokers.
- According to ASIC’s reports, the commission amount is usually based on or linked to the amount borrowed by the consumer, with any increase in the amount of credit to meet the cost of the
- life insurance premium also enabling the car Dealer to earn a higher commission from the lender.
The key findings
The key findings in ASIC’s first report were that:
- most consumers were not prepared and did not know anything about add-on insurance products before they got to the dealership
- by the time consumers were offered add-on insurance they were exhausted by the purchasing process and, in some instances, felt pressured by sales staff, and
- many consumers could not remember what products they purchased, how much they had paid. or for what the products covered them.
The key findings in ASIC’s second report were that:
- insurers charged consumers substantially more for car yard life insurance than for ADI-distributed life insurance
- most insurers charged business-use consumers more than personal-use consumers
- car yard life insurance is often substantially more expensive than term life insurance, even though term life insurance provides more cover
- single-premium policies result in poor outcomes for consumers
- high volumes of car yard life insurance are sold to young consumers who are unlikely to need it
- high volumes of car yard life insurance are sold to consumers who may not have wanted the product, and
- there are poor claim outcomes for consumers.
Having regard to its findings, ASIC has said that it will take a number of steps to ensure consumers get value from car yard life insurance, and this may include:
- encouraging insurers to review and change both the ‘design and value of car yard life insurance, including the level of supervision of their authorised representatives’
- monitoring the practices of individual insurers to ensure that adequate changes are made to existing products, and
- taking enforcement action against individual insurers
- requiring more detailed disclosure of the price of particular products
- introducing additional disclosure requirements – such as the proportion of overall premiums returned in claims, and
- reviewing training standards for the sale of car yard life insurance.
At this stage ASIC has not yet published details of any follow-up steps having been taken.
ASIC also does not appear to have consulted with or invited industry stakeholders to make submissions as part of its investigation before releasing its reports. We understand AADA will raise this matter during their discussions with ASIC on the flex-commission issue.