ASIC’s latest report (Report 492) on add-on insurance makes for sobering reading. Following a review of add-on general insurance products sold through car dealers, ASIC identifies a number of concerns. This follows earlier reports focused on consumer experiences (Report 470) and the sale of life insurance through car dealers (Report 471). The most recent report focuses on the design of insurance policies and sales processes.
What is add-on insurance?
Add-on insurance generally refers to insurance products that are ‘added-on’ to the sale of a non-insurance product. For the purposes of the report, ASIC reviewed the following five add-on insurance products:
- Consumer Credit Insurance (CCI);
- Guaranteed Asset Protection Insurance (GAP);
- Loan Termination Insurance;
- Tyre and Rim Insurance; and
- Mechanical Breakdown Insurance.
What were ASIC’s key findings?
Overall, ASIC was not impressed with the quality of insurance policies sold through car dealers, sales processes and pricing. They identified six main concerns:
Low claim payouts
Over a three year period, add-on insurance products delivered an overall claims ratio of 9%. ASIC is concerned that these insurance policies are not providing value for consumers and has announced it will consult with each insurer to seek information on their claims ratio targets. ASIC is also considering making claims ratios available to the public if outcomes do not improve.
Significant upfront commissions to car dealers
In their report, ASIC found that upfront commissions paid by insurers to car dealers accounted for up to 79% of the premium paid. Over the past three years, the value of commissions paid to car dealers was approximately four times the amount of claims. Given ASIC’s consumer protection mandate, it is concerned that consumers may be subjected to pressure-selling tactics due to the significant financial incentive to car dealers to make policy sales.
Lack of price competition
Dual and discretionary pricing arrangements were picked up by ASIC during the review. ASIC is concerned about the potential for unfair outcomes to consumers due to the significant variation in prices based on factors unrelated to risk. They have foreshadowed further regulatory action if this practice continues.
Poorly designed policies
During the review, ASIC identified policies that were of low value, overly restrictive, overlapping or unnecessary. In particular, the review identified a range of products that were of ‘negative value’. This meant that the cost of the policy was higher than the maximum amount payable in the event of a claim. ASIC has clarified that it expects insurers to have internal controls to ensure ‘negative value’ policies cannot be sold and for insurers to provide refunds to consumers where such policies have been issued. ASIC has also indicated it intends to continue surveillance in this area to review the extent of the problem.
Single premium policies
As part of the review, ASIC analysed the way that policies are priced and purchased. It found that most add-on insurance is sold as a single premium policy and added to the consumer’s car loan. ASIC is concerned that insurers do not have adequate procedures or controls to ensure premiums are refunded upon early termination of CCI or GAP policies due to specified events. ASIC intends to follow-up and work with insurers to improve outcomes for consumers.
ASIC found that sales processes often led to misinformed consumer decision-making due to risks of information overload, decision fatigue and pressure tactics. It found cases of add-on insurance being issued to consumers who were never eligible to claim and instances where the cost of the policy was not clearly disclosed. ASIC has requested insurers to improve their supervision of car dealers at the point of sale and to implement incentives for car dealers to be compliant. ASIC has made clear its position that insurers are accountable for unfair tactics engaged in by their authorised representatives.
ASIC has advised the industry that it intends to conduct further surveillance to review the extent of problems and to detect improvements. It is also considering further regulatory action if consumer outcomes do not improve.
ASIC’s latest missive reveals its desire to seek greater powers especially around product suitability and intervention capabilities, as recommended in the Murray Financial System Inquiry (FSI). Until such powers are realised, ASIC’s toolkit to address its concerns is quite limited.
However, as emphasised by the Insurance Council of Australia (ICA), add-on insurance plays an important role in ensuring that consumers are adequately protected by insurance for large purchases at a time when they may overlook the need for insurance. In response to the report, the ICA has proposed measures such as a transition to at 20% commission cap, which already applies to CCI under the National Credit Code. Any such proposal is subject to approval by the ACCC.
Nonetheless, the release of the report is a timely reminder for insurers to revisit their policies, practices and internal systems to address ASIC’s concerns and to ensure they remain compliant.
It is clear that ASIC expects organisations to constantly monitor and review their products to ensure that positive consumer outcomes are achieved. ASIC’s focus is not only on sales practices, but also on the manner in which products are designed, claims are managed and that data collected from claims and complaints is used to identify and rectify areas of concern. Meeting ASIC’s expectations will require a new approach to products, and will ultimately require the implementation of a product governance framework that provides senior oversight of design, distribution and after-sale processes.