Do you want life insurance with that?
IF YOU’VE purchased a car recently, there’s a chance you’ve been sold a lemon by a salesperson on commission.
But it’s not the car — it’s the life insurance that goes with it.
Banks and car dealers who have been selling “junk” insurance to unwitting consumers have been put on notice by the financial watchdog in a scathing series of reports.
The Australian Securities and Investments Commission (ASIC) has slammed the industry for taking advantage of vulnerable consumers and warned enforcement action could be on the way, potentially paving the way for millions of dollars in refunds.
In the reports, The sale of life insurance through car dealers: Taking consumers for a ride and Buying add-on insurance in car yards: Why it can be hard to say no, ASIC found consumers were paying up to 18 times more for life insurance purchased through a car dealer.
Life insurance purchased through car yards, bundled as part of controversial Consumer Credit Insurance (CCI) products, was found to have a much lower payout rate than other insurance categories: just 6.6 per cent of premiums paid upfront were returned to the consumer in claims.
By comparison, motor vehicle insurance pays out about 75 per cent, while home and travel insurance sit at around 60 per cent.
That means lenders are pocketing nearly 94 cents in the dollar on these products. “This get-rich-quick scheme for car dealers and finance providers has to end,” said David Leermakers, senior policy officer at the Consumer Action Law Centre.
“Salespeople earn up to 90 per cent commission on some of these products that are such poor value and it encourages them to sell in an underhanded and sneaky way.”
In its report, ASIC argued car dealers selling life insurance indicated a “market failure and a lack of demand-driven competition”. Many consumers found the sales process confusing and “some can feel pressured to buy products they don’t understand”.
ASIC deputy chairman Peter Kell.Source:AAP
The Consumer Action Law Centre estimates Australian consumers are due for about $70 million in refunds from the roughly $350 million of CCI sold every year.
Victorian Ben Searle, 21, was sold CCI and gap insurance with a car loan, believing it would provide protection if he lost his job — only to find out after the fact that a pre-existing condition meant he couldn’t claim.
The gap insurance was slipped into the loan paperwork without Ben’s knowledge. Consumer Action intervened, saving Mr Searle more than $5000 in insurance he would have had little chance of benefiting from.
Mr Leermakers said people were “waking up” to the scandal. “Consumer Action has helped our clients receive over $20,000 in refunds in the last six months,” he said.
ASIC Deputy Chair Peter Kell said the watchdog 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,” he said.
“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.”
ASIC says some insurers had already committed to changing their pricing and reviewing the design of the products, and others were reviewing the offer of life insurance products through car dealers.
But Mr Kell warned if “substantial and meaningful changes” were not made, ASIC would “consider the full range of regulatory options available, including enforcement action”.
Last year, two insurers agreed to refund more than $2 million in junk insurance sold through collapsed payday lender The Cash Store.
In the UK, the selling of Payment Protection Insurance, the equivalent of CCI, led to an estimated 1.25 million ombudsman complaints made about mis-selling and more than £22 billion ($42.8 billion) paid in compensation since 2011.
The Insurance Council of Australia declined to comment on ASIC’s report as life insurance products are handled by the Financial Services Council.
In a statement the Financial Services Council said: “We welcome the ASIC report into car yard insurances.”
“We treat all regulator reports into consumer markets very seriously. We will review the report and work through the issues with our members and policymakers.”
frank.chung@news.com.au
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