AADA believes dealers are the unfair targets of an insurance cartel’s bid to cap commissions. We have responded to an application to the ACCC by a group of insurance companies that want to be able to limit commissions and other payments to dealers.

The application sought authorisation on behalf of themselves and potentially other insurers to implement a proposal that will limit the commissions and other payments or benefits paid to the distributors of ‘add-on’ insurance products through the motor vehicle dealership channel.

Applicants

• Aioi Nissay Dowa Insurance Company Australia Pty Ltd
• Allianz Australia Insurance Limited and Allianz Australia Life Insurance Limited
• Eric Insurance Limited
• Hallmark General Insurance Company Ltd and Hallmark Life Insurance Company Ltd
• Insurance Australia Group Limited
• CGU Insurance Limited
• Swann Insurance (Aust) Pty Limited and Insurance Australia Limited
• QBE Insurance (Australia) Limited
• St Andrew’s Life Insurance Pty Limited
• Suncorp Life & Superannuation Limited
• MTA Insurance Limited and AAI Limited
• Virginia Surety Company Inc.

The applicants proposed to enter into a contract, arrangement or understanding that will limit commissions to 20 per cent of premiums, for up to 10 years unless superseded by another mechanism.

AADA response

AADA has a number of concerns that the insurers’ proposal seeking authorisation to engage in cartel behaviour by proposing a 20 per cent cap under the Code will not result in any significant public benefit and is likely to have unintended consequences.

The insurers’ proposal is simplistic and arbitrary; not subject to regulatory enforcement; and in a number of aspects takes advantage of ASIC’s in-principle letter of support of 22 August 2016. The proposal, AADA believes, maintains insurers’ margins on their products to the private detriment of the motor vehicle dealership channel without any significant public benefit.

AADA believes the regulators are not taking an even-handed approach when they claim “car yard” insurance is failing the public.

Without understanding and assessing the independently produced data from APRA they demonstrate a stereotypical bias against franchised motor dealers and the industry franchised dealers manage, which contributes two per cent of the Australian GDP.

We are not “car yard operators”. As described by the regulators, we are franchised motor dealers who act as intermediaries through which insurance companies acquire and retain customers.

Selling insurance at the time of a new car purchase creates a customer for the insurance company and the possibility of selling other insurance products.

Intermediaries allow Insurance companies to access customer channels, paid for and managed by the intermediary.

Nearly half of all insurance products sold in Australia last year are motor vehicle related. This means franchised motor dealers have control of a very important channel for the insurance industry. Last year the insurance industry paid $3.5 billion commission to all intermediaries. These are legitimate acquisition costs. In the same period they spent $2.5 billion on acquisition costs through their own call centres. In other words they pay more to intermediaries to do work acquiring insurance business than they spend themselves. This is not unique to Australia; it applies all over the world.

An interesting analysis from the independent APRA data is the commission paid by the insurers to intermediaries, expressed as a percentage of gross written premiums.

As ASIC and the ACCC are focusing on commission paid to car dealers, the statistics you would think would show an anomaly in that area. Two separate APRA quarters are shown below which indicates travel insurance is the highest commission paid and the bank enforced mortgage insurance is masked for confidentiality reasons?

Remember we introduce a number of insurance products to the new car owner who then for the most part stay with that insurer for life and possibly buy other non-motor insurance.

Commission Paid by Insurers to Intermediaries as a % of Gross Written Premium

Competitive disadvantage

The insurers’ application also places motor vehicle dealers at a competitive disadvantage where identical products (not subject to the 20 per cent cap) are distributed through other channels. This disadvantage will result in a detrimental impact on consumers because it will limit the competition for price on those insurance products and impact on the channel through which competitively priced insurance can be offered.

AADA concluded in its submission that the insurers’ proposed cap of 20 per cent is arbitrarily referenced to the legislative cap on consumer credit insurance (CCI) and is not supported by evidence from the insurers or ASIC to support their assertions of public benefit flowing from their conduct. There is nothing to suggest that the cap will result in lower prices for consumers and could lead to higher prices in the longer term in a less competitive market.

No consultation

ASIC’s review of add-on insurance products was conducted over a three-year period (2013-15 financial years) and at no time during that period was AADA consulted or invited to comment. We understand ASIC has been engaged in confidential discussions with the insurance industry for many months without consulting with AADA. This has resulted in an imbalance in the information provided to ASIC, and the assessment by it of relevant facts and issues.

AADA submitted that the insurers’ proposals do not address ASIC’s concerns, will not result in any significant public benefit and gives rise to unintended consequences. In particular, the insurers’ proposals seek a continuation of access to the motor vehicle dealership channel but does:

• not resolve the issue of reverse competition
• not capture all the channels through which their identical products are distributed
• include comprehensive motor vehicle insurance
• not justify 20 per cent as an appropriate cap
• not propose a realistic transitional period
• not propose other measures to address concerns.

Reverse competition

ASIC identified ‘reverse competition’ where insurers’ compete on price paid to a car dealer in commissions to buy access to distribution channels, which increases the cost to consumers and decreases consumer-driven competition. Transparent pricing was identified as another key feature that enables consumer-driven price competition.

The insurers’ proposals do nothing to address either of these issues. Further, the proposals do not create any mechanism to force savings from the proposed cap to be passed through to consumers.

Unless the insurers propose to engage in an anti-competitive allocation of dealers among themselves, the problem of reverse competition will remain. Ironically, the insurers’ proposal is likely to create an incentive to increase rather than decrease premiums on add-on insurance products, as this will become the only means available to the insurers’ to compete for dealer distribution.