Hot Topic: ASIC review of add-on insurance products

On Monday 12 September 2016 ASIC released its latest report outlining its review of the sale of add-on insurance products by motor dealers …

The report is not good news for motor dealers, made obvious from the get-go in its title – A market that is failing consumers: The sale of add-on insurance through car dealers. This follows on from previous reports from February 2016 and outlines ASIC’s view “that consumers are being sold expensive, poor value products … that provide consumers very little to no benefit”, while exposing them to “a sales environment with pressure selling, very high commissions and conflicts of interest”.

The report examined data collected between the 2013 and 2015 financial years from seven general insurers who issue add-on insurance products and are estimated to make up over 90 per cent of the motor dealer add-on insurance market. The review focused on five specific products commonly sold by motor dealers:

1. Consumer credit insurance
2. Loan termination insurance
3. GAP insurance
4. Tyre and rim insurance
5. Mechanical breakdown insurance / Extended warranty

In addition to their report and media release, ASIC have released an “infographic” comparing dealer commissions against successful consumer claims: The infographic claims the following findings as a result of ASIC’s review:

  • Motor dealers were paid $602.3 million in commissions, while consumers were only paid $144 million in successful claims in relation to the products listed above.
  • Commissions paid to motor dealers were as high as 79% of the premium paid by consumers.
  • Consumers paid $1.6 billion in premiums and received only $144 million in successful claims, representing a very low claims payout ratio of 9%.
  • For some products, even consumers who made a claim had paid more than what they got back.
  • A voluntary cap of 20% on commission payments would reduce premiums paid by consumers on the products listed above by nearly 70%.

ASIC advised it is putting general insurers “on notice”, stating 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 they noted they would be seeking from insurers were:

  • A significant reduction in the amount of commissions paid to anyone who sells an add-on insurance products through motor 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 up front 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.

ASIC says insurers have notified them that they intend to implement a 20% cap on commissions which it agrees is a positive step.

“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 Deputy Chairman Peter Kell

What does this mean for motor dealers?

This report and review by ASIC is running concurrently with another review already underway with regard to flex commissions and the sale of vehicle finance by dealers to retail customers.

We anticipate that ASIC will release its final recommendations and roadmap to legislative changes on the flex commissions matter by the end of October.

Implementation of legislative changes following that review is expected to be effected by early 2018. We suspect that this timeline is due to the changes being made via legislation, rather than regulations, and accordingly must pass through Federal Parliament.

Both reports (the flex issue, and add-on insurance as discussed in this update) highlight that significant changes will be required to your dealership’s processes and finance and insurance departments as a whole.

The measures proposed are likely to have a significant impact on the profitability of your dealership.

Dealers will need to consider their entire dealership’s operations with a view towards profit improvement across all departments – including adapting processes to improve penetration levels of finance and insurance products to customers and identifying innovative means to improve sales (for example, using a menu-selling approach to finance and insurance).

Have you run the numbers? What could a 20% cap on insurance commissions look like in your business?

Indeed, dealers – and specifically business managers within dealerships – will need to re-evaluate current practices and put processes in place to ensure that the finance and insurance “road to a sale” is transparent and credible to customers, instilling a view that you are working in the customer’s best interests as their “trusted advisor”.

Other measures could also include taking a “Blended Floor” sales approach, where the vehicle sales manager is responsible (and remunerated accordingly) for driving all sales in the dealership’s front end, not just the vehicle sale.

The measures likely to follow ASIC’s reviews represent a defining moment in dealer profitability and viability. Sitting back and waiting for a favourable outcome is simply not an option!


Like to know more?

Fordham has significant expertise and the strategies to assist in maximising the performance and profitability of your dealership and can help you plan for this major realignment. Should you wish to discuss these matters further, please contact one of our Motor Dealer Services leadership team on +61 3 9611 6601 or your Fordham Partner.
Download Hot Topic-ASIC review of insurance-September 2016

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