Episode 32: Add-on insurance

ASIC Senior Executive Leader Michael Saadat joins the podcast to discuss add-on insurance, and ASIC's work to shine a light on poor practice, remediation outcomes, and efforts to protect consumers in the future.

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Episode 32 transcript: Add-on insurance

16 March 2018

ASIC podcast – Episode 32 transcript

Host: Hello and welcome to the official podcast of the Australian Securities and Investments Commission. In today's episode we'll be discussing add-on insurance and the work that ASIC is doing in this area. My name is Tessa Loftus and with me this time around is Senior Executive Leader of Deposit Takers, Credit and Insurance at ASIC, Michael Saadat. Michael, thanks very much for your time.

Michael Saadat: Thanks very much Tessa.

Host: So before we talk about ASIC's work in this area, could you give me a little bit of an explanation of what add-on insurance is, and what it's for?

Michael Saadat: Add-on insurance is a type of insurance that's sold when you buy another product and in this case we've been focusing on add-on insurance that's sold when you buy a car. So most consumers would be familiar with Comprehensive Car Insurance that you usually buy when you've got a car, that protects you if you have an accident, but there's a whole range of other add-on insurance products that are also sold when you buy a car, especially when you buy a car on finance. And these are insurance products that are designed to provide coverage if something goes wrong and you can't pay back your loan, so products like gap insurance or consumer credit insurance but there's also other products including tyre and rim insurance. So ASIC's had a focus on these products because we don't think consumers understand how these products work and there have been quite a few poor consumer outcomes that we have identified in our work associated with these products.

Host: What are some of the problems and the poor outcomes you've identified with add-on insurance?

Michael Saadat: We've identified a range of problems with the sale of these products through car dealerships. Firstly, we've identified that these products can be very expensive for consumers, often in the thousands of dollars, and they're expensive partly because insurers have been paying very high commissions to car dealers to sell these products. We've seen examples of commissions of up to 80% for these products, which means for example, if you are paying $1000 dollars for gap insurance and the commission on that product is 80%, then the insurer is paying 80% of that $1000 to the car dealer as a commission, so $800. Which as you might guess doesn't actually leave a lot of money on the table for claims and what we found was actually that consumers were not getting much money back in claims with these products and why we've been saying for some time that these products are really very poor value for money for consumers.

One of the key statistics that we identified through the extensive data we collected in this market is that over a 4 year period consumers paid over 1.6 billion dollars in premiums to insurance companies for these add-on insurance products. And of that 1.6 billion, insurers paid car dealers around 600 million dollars in commissions, but consumers only received around 150 million dollars back in claims. So car dealers have been earning 4 times more in commissions than consumers have been receiving in claims and this is why we've been saying that this is a market that has been failing consumers.

Host: So in the last few months, there've been several quite significant add-on insurance remediation programs initiated by ASIC, can you tell me a little bit about those?

Michael Saadat: Yeah we've been doing a lot of work to address what we consider to be unfair outcomes that have occurred with these products over a number of years. And we've announced so far four very large remediation programs or refund programs for consumers who've been affected by these unfair outcomes. So over $120 million dollars will be refunded by these insurance companies to over 250,000 consumers and this is for situations where consumers were sold insurance they couldn't claim on, they were sold insurance that was of little or no value to them, or insurance where the amount that the consumer was paying in premiums was actually higher than what they could have gotten back if they made a claim. And we think all of these outcomes were unfair which is why we've negotiated with the insurers to have these remediation programs put in place. And insurers are now contacting those affected consumers, in some cases sending cheques automatically to those consumers, but in other cases insurers are contacting consumers to get some more information and consumers will receive refunds when they provide that additional information to the insurance company.

Host: So that's a lot of money to a lot of people and given the number and scale of these remediation programs, does ASIC have any concerns about the inherent design flaws and the sale of these products?

Michael Saadat: Yeah we certainly do and we've been focused a lot on how these products are designed as well as the way they're sold. So I mentioned that commissions have previously been very high, we've managed to see commissions drop quite significantly and most insurers have reduced commissions to around 20%, and we think this is a very positive step. The cost of these policies as a result of those changes has also come down quite a lot, so these products are now much cheaper for consumers. But the other concern that we've had is around the sales environment in which these products are sold. We've done some research that shows consumers often don't make a good decision when sold these products. They're focused on the car and all of the choices that need to be made when buying a car and they're certainly not focused on the finance or the insurance that's also sold with that car. So what we think is necessary, is to separate the sale of the car from the sale of the insurance. And we've been investigating changing the rules so that car dealers can't sell both the car and the insurance at the same time. And what this will do is make sure that consumers are able to think about whether they really do need add-on insurance products like gap insurance or consumer credit insurance and have time to think about that rather than have to make a quick decision in what might be a pressured environment in a car dealership.

Host: So there's the previous remediations that you've mentioned before, but should we expect to see more remediation programs and further regulatory action in this area?

Michael Saadat: Yes so we are talking to other insurers as well that have been selling products through car dealerships. So we will be looking to make additional announcements about that work. But also as I mentioned we've been investigating changing the rules to separate the sale of the insurance from the car and we're about to start a second round of consultation with stakeholders on a model which will see that implemented. We call it a deferred sales model and ASIC will be making some announcements about that pretty soon.

Host: In addition to the work on add-on insurance, what is ASIC doing to assist people who are buying a car or thinking about buying a car?

Michael Saadat: There's a lot of really useful information on our MoneySmart website. That's moneysmart.gov.au.

So I would recommend any consumer who's thinking about buying a car to head to that website and review the information that we've got there.

But in particular I would really recommend the MoneySmart cars app for any consumer thinking about buying a car. This app lets you know what the true cost of owning a car is. And in a very simple way, illustrates what the additional costs of financing a car and buying these add-on insurance products is when you add it all up and you think about the interest over the life of the loan.

Definitely worth checking out, you can download that from the Apple store or from the Google play store.

Host: Great, thanks very much for your time Michael.

Michael Saadat: No worries at all, thank you.

Host: And we'll be back with another episode of the ASIC podcast very shortly.