ASIC has published Report 492 “A market that is failing consumers: The sale of add-on insurance through car dealers”. The Report concludes that add-on insurance products sold through car dealers provide significantly poor outcomes for consumers.
ASIC reviewed seven insurers who issue add-on general insurance products through car dealers. These insurers were estimated to make up over 90% of this market.
The review found that:
- Consumers receive low claim payouts relative to premiums
- Consumers receive much less in claims than dealers receive in commissions
- There is a lack of price competition
- Insurers sell products that are poorly designed: Many add-on products were poorly designed with consumers often paying for something they did not need or would not be eligible to claim for.
- Single premium policies increase the cost for consumers
- Sales processes inhibit good decision-making.
The review focused on five add-on insurance products commonly sold by car dealers to consumers when they purchase a new or used car:
(a) CCI—This insures a borrower’s capacity to make repayments under a car loan, including insurance against sickness, injury, disability, death or unemployment.
(b) Guaranteed asset protection (GAP) insurance—This covers the difference between what a consumer owes on their car loan and any amount they may receive under their comprehensive insurance policy, if the car is a total loss.
(c) Loan termination insurance—This covers the difference between what a consumer owes on their car loan and the market value of the car if they return it because they cannot make repayments due to illness or injury.
(d) Tyre and rim insurance—This covers the cost of repairing or replacing damaged tyres and rims from blowouts, punctures or other road damage.
(e) Mechanical breakdown insurance—This covers the cost of repairing or replacing parts of the car due to mechanical failure after the manufacturer’s or dealer’s warranty has expired (often referred to as an ‘extended warranty’).
As a result of its findings ASIC is seeking the following key commitments from insurers:
- A significant reduction in the amount of commissions paid to anyone who 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.