ASIC’s damning investigation into the sale of insurance by car dealers is likely to drastically change the add-on insurance market. Insurers and their agents must act quickly to avoid enforcement action by ASIC.
Here’s what insurers need to do. Now. If not sooner.
Reduce excessive commissions
Review and adjust add-on remuneration arrangements. ASIC has called for significant cuts in commission after finding that car dealers are receiving commissions that are as much as 3 – 4 times the amount that consumers receive as claims payments – and it appears that there’s a direct link between higher commissions and higher premiums.
ASIC expects all cost savings to be passed to consumers.
Review policy coverage
Low claims ratios represent poor value for consumers. While the reduction of high commissions and a lowering of premiums will naturally increase claims ratios, insurers should also consider redesigning some products.
Restrictive insuring clauses, expansive exclusions and low sub-limits all contribute to poor claims ratios. ASIC believes unrelated ‘additional’ covers represent poor value because they are unlikely ever to be used. And extended warranty insurance should not cover rights that consumers already receive at no cost under the Australian Consumer Law.
End unfair pricing practices
‘Dual pricing’, where higher premiums are charged to business customers for products that are identical to cheaper personal-use products will need to cease.
So will ‘discretionary pricing’ practices where car dealers are permitted to charge flexible premiums within pre-set ranges, resulting in price disparity for consumers.
Bundled covers that provide ‘overlapping’ benefits, where consumers can only claim under one cover (but can’t only buy one cover) will need to be discounted to reflect the reduction in risk.
Eliminate low or negative value products
Policies which do not offer real value to consumers will need to be redesigned. A classic example is sub-limits which have the effect that consumers’ claims entitlements only marginally exceed the premium, or not at all.
Insurers who have been selling these products are expected to immediately start a process to refund these customers.
Stop charging single premiums
Upfront payment of the full premium for a multi-year policy increases interest charges, and reduces consumer awareness, the number of claims and the likelihood of a refund for early termination. This practice will need to cease. Immediately.
Although ASIC did not suggest an alternative, monthly repayments increase consumer awareness and eliminate the problem of affordability if the full premium cannot be financed.
Implement best practice sales processes
A best-practice sales process:
According to ASIC, most sales processes are designed to maximise sales by telling the consumer as little as possible about the policy price, exclusions or eligibility. Only one insurer asks questions to determine if consumers are eligible for a policy. ‘Decision fatigue’ is a key concern, due to the overwhelming number of options presented. This leads to poor choices, and fails to promote understanding of the product being sold.
Even more concerning, some insurers train dealers to deliberately conceal the price or to use unfair tactics to increase sales. This must immediately cease and victims of pressure selling will be entitled to refunds.
Review supervision arrangements
Comprehensive and effective monitoring and supervision programs aimed at detecting mis-selling will be required to ensure compliance.
Both random and targeted offsite and onsite reviews of dealer activities will be required, and well-structured consequence management frameworks, which rate various actions and apply consistent consequences, are essential.
For serious non-compliance, clawback of commissions, suspension or termination may be required.
There’ll be more to come
ASIC has presaged future changes in a number of areas, while not yet committing to a specific course of action:
A step too far?
Some of ASIC’s views potentially push regulatory oversight too far. One of the emerging themes would see insurers become responsible not just for treating consumers fairly, but for meeting a ‘best interests’ duty that resembles the fiduciary duty of brokers who actually act for the client.
Here are some examples…
Because consumers don’t read disclosure documents, ASIC is concerned that merely providing them is inadequate. But neither the Corporations Act nor the Insurance Contracts Act requires documents to be read, only provided.
While, it’s important that consumers have time to read them, they cannot be forced to do so. Oral disclosure of terms and conditions is unlikely to be more effective, since ASIC has also noted that consumers quickly become overwhelmed.
An alternative solution may be to collect better underwriting or eligibility information in the application form, so insurers don’t have to assume a quasi-broker role.
Better still, let’s move to mandatory simple disclosure documents – this has been particularly successful for managed investment schemes.
General advice and ‘no advice’ sales models are considered by ASIC to increase the risk that insurance will be inappropriate for the consumer.
Implicit in this, would be mandatory personal advice on the sale of add on insurance. But surely this would only serve to create new conflicts of interest for sellers, without improving outcomes for consumers?
ASIC advocates that insurers adopt processes to ensure that consumers obtain refunds to which they are entitled.
It goes without saying that insurers who have issued multiple policies who are asked to cancel, say, the motor vehicle policy, should identify related policies and check whether the insured also wishes to cancel them.
But it would impose an unreasonable burden if a number of different insurers underwrite the policies. It should be sufficient for the insurer of the cancelled policy to suggest the insured check whether other policies need to be cancelled.
An obligation on insurers to make periodic investigations into whether insureds still need a single premium policy would go beyond the duty imposed even on insurance brokers.
A move to monthly instalment premiums would surely sufficiently increase consumer awareness of whether they are paying for insurance they don’t need without imposing broker-type obligations on insurers?
And then there’s Consumer Credit
Motor financiers also need to pay attention. ASIC has made much of the fact that add-on insurance is unsuitable for the consumer’s needs, and that insurance is also frequently financed.
Consumer lenders cannot enter into loans unless they are not unsuitable for the borrower. Loans which relate to unsuitable insurance policies, e.g. negative value policies or where the consumer is not eligible for cover, such as gap insurance where there is no gap, can hardly be assessed as ‘not unsuitable’.
Financiers will need to be more wary of the nature of financed insurances, especially if they are also selling the insurance.
Click here for information about our experience with add-on insurance sales.
Author: Jaime Lumsden