Insurers take car buyers for a ride
ASIC is calling on insurers to significantly improve consumer outcomes following the release of two reports into add-on insurance products commonly sold to consumers when purchasing cars.
The reports found that many consumers are being sold add-on insurance products that are expensive and provide poor value, in a sales process that many consumers find confusing and where some can feel pressured to buy products they don't understand.
ASIC's report, “The sale of life insurance through car dealers: Taking consumers for a ride” (Report 471), found that life insurance sold through car dealers is often substantially more expensive than comparable life insurance products, provides very low claim payouts relative to premiums, and is sold by car dealers who are paid high commission by insurers on sales.
ASIC reviewed insurers offering life insurance as part of consumer credit insurance policies sold through car dealers.
Not all life insurers operate in this market: ASIC reviewed five major life insurers, estimated to make up 90 per cent of this market, and obtained detailed data about the way in which these products operate. Report 471 found that:
consumers can pay up to 18 times more for life insurance purchased through a car dealer, compared to similar term life insurance which provides more cover
consumers purchasing a car for their small business could be charged up to 80% more to get exactly the same life insurance cover as a consumer with a personal car loan
life insurance sold through car dealers is priced as an expensive single upfront premium for a multi-year insurance policy. The upfront premium is usually added to the car loan, so consumers pay interest on top of the premium, which can substantially increase the cost of the product. Furthermore, they can lose out when they repay their car loan early
one in ten policies was sold to consumers aged 18 to 21, who are unlikely to need life insurance
there is a low level of awareness of the add-on insurance product and its features.
ASIC Deputy Chair Peter Kell said ASIC was calling on the insurance industry to lift its standards.
'The message to industry is clear: substantial improvements need to be made to both the design and distribution of these products. Insurers must address the high costs, poor value and poor claim outcomes of their add-on products, especially when the very same insurers provide alternative products that offer cheaper and more comprehensive cover.'
While noting some encouraging initial steps from the insurance industry, Mr Kell also said 'If substantial and meaningful changes are not made we will need to take further action. ASIC will consider the full range of regulatory options available, including enforcement action.'
As well as life insurance add-on products, ASIC is also undertaking further work examining the design and sale of general insurance add-on insurance products, including general insurance sold via car dealers.
ASIC has also released its report “Buying add-on insurance in car yards: Why it can be hard to say no” (Report 470), which analysed qualitative research on the experience of consumers who are sold add-on insurance by car dealers.
Report 470 found that many consumers who purchased add-on insurance products:
had no awareness of add-ons, including their value, before entering the car yard
had already invested large amounts of time, energy and mental effort in buying the car and so, by the time they were offered the add-ons, found it hard to say no to the offer of add-on insurance
said that they valued the insurance for providing peace of mind, but few could recall which products they had purchased, how much they cost and what they were actually covered for
some consumers who did remember what they had bought, regretted their decisions.
ASIC's MoneySmart website has some key questions consumers should ask car dealers before they purchase add-on insurance and explains how to avoid the hard sell.
Find out just how much more consumers pay for car yard life insurance compared to other types of life insurance in MoneySmart's new life insurance infographic.
29 February 2016.