ASIC puts insurers on Notice – Dealers will lose income streams.
Hi. Bob Aldons from Car Business again, with advice on cars and everything automotive. Let’s talk about dealer profit from insurance. You’ll recall that I’ve spoken about the profit that dealers make from new car buyers recently and I go into it in detail in my upcoming book, True Confessions of a Car Dealer. On average dealers make $2500 from the car sale and more from the sale of car insurance products. The ASIC investigation into the insurance products that dealers sell is coming to a close soon and ASIC will implement rules and regulations for insurance companies that supply these products.
Arguably, there isn’t a real problem with comprehensive insurance. Dealers are paid a commission of around 20% of the premium written and that’s pretty reasonable. Nothing more or less than most other brokers chase. However, when it comes to Consumer Credit Insurance, Tyre and Rim Insurance and GAP insurance, the game changes significantly. From my memory dealers receive commissions from around 40% on these products up to 70% and they allow their ‘business managers’ to do a bit of gouging. CCI premiums are thousands of dollars and 40% of say $3000 is a lot – $1200 and of that, the ‘business manager’ generally receives about 10-20% of that – pretty good income in anyone’s language.
And extended warranty? Don’t let me start on this one. With most new cars having a standard warranty anywhere from 3 years to 7 years, there isn’t a real need to take on an extended warranty. And more so when the ACCC mandate consumer law. There’s a real chance that a car manufacturer will have to provide extended warranty themselves if something fails in say 2 years after the factory warranty expires. The only problem with this is that the owner must be aware of their rights and be prepared to fight for those rights.
So it will be interesting as to what ASIC do from here – and what the dealer reaction to this will be. Dealers have built a lot of their business on this model and if most of it goes away, someone somewhere will have to pay the piper.
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ASIC commented as follows.
Our report released today (REP 492) finds that consumers are being sold expensive, poor value products; products that provide consumers very little to no benefit; and a sales environment with pressure selling, very high commissions and conflicts of interest.
These products are sold to consumers when they purchase a new or used car, and cover risks relating to the car itself or relating to the loan that the consumer takes out to purchase the car. Examples include consumer credit insurance and tyre and rim insurance.
ASIC Deputy Chairman Peter Kell said, ‘There are serious problems in this market that need to be immediately and comprehensively addressed by insurers.’
‘ASIC will be undertaking further work, including potential enforcement action, to ensure that this market delivers acceptable outcomes for consumers. We will also be looking at how insurers can refund consumers who have been sold inappropriate products,’ said Mr Kell.
For the three year period that we reviewed, we found that:
- Consumers obtained little financial benefit from buying add-on insurance, with consumers paying $1.6 billion in premiums and receiving only $144 million in successful insurance claims – representing a very low claims payout of nine per cent. For some major add-on products, the benefit to consumers was even lower, with consumer credit insurance claims payouts representing just five cents for each dollar of premium.
- Car dealers earned $602 million in commissions – over four times more than consumers received in claims, with commissions paid to car dealers as high as 79 percent.
- Payment for these insurance products is commonly packaged into the consumer’s car loan as a single upfront premium. This can substantially increase the cost of the product by increasing the loan amount and interest paid. Research shows that consumers are often unaware that they even have the policy when it is paid upfront as a single premium, and they may not get a premium refund if they repay their car loan early. Policies have been sold where it is impossible for the consumer to receive a claim payout that is greater than the cost of the insurance.
- The car sales environment inhibits good decision making about these products because of the conflicts of interest and pressure sales built into the distribution model. The consumer is focussed on purchasing a car and financing that purchase – not on the details of the complex insurance policy.
Today’s report follows ASIC’s release of two reports in February this year about the sale of add-on life insurance by car dealers. ASIC stressed the need for insurers to address the high costs, poor value and poor claim outcomes of life insurance products sold this way.
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 we are seeking from insurers are:
- 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.
Insurers have notified ASIC that they intend to implement a 20 per cent cap on commissions, which is a positive step. Insurers in this market will be also providing ASIC with data on prices, premiums and claims on a regular basis so that it can monitor the impact of changes on consumers.
ASIC Deputy Chairman Peter Kell said, ‘While we welcome the initial steps taken by the insurers to improve the value of these products for consumers, there is still a long way to go. If industry does not deliver swift improvements for consumers, ASIC will take further action, including enforcement action where appropriate.’
ASIC’s review of these products is ongoing. ASIC will continue to work with insurers and consumer representatives to ensure that proposals for change deliver significantly improved value to consumers.
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