The Australian Securities and Investments Commission is proposing to use its product intervention power to crack down on the sale of add-on insurance and warranty products sold with motor vehicles.
ASIC has released a draft instrument, limiting the sale of add-on insurance products to issuers and intermediaries that have met stringent disclosure requirements. The regulator has called for feedback.
The product intervention power allows ASIC to make individual and market-wide orders where there is a risk of significant consumer detriment. It can take a range of temporary actions including stop orders, banning a product or product feature, imposing sale restrictions and amending product information.
ASIC first used the product intervention power last September, when it stopped a group of short-term lenders using a loan structure where the credit provider’s charges were within the limits set under the Credit Act but an associate charged upfront, ongoing and default related fees under a separate contract for management of the loan.
Products covered by the latest draft instrument include consumer credit insurance, guaranteed asset protection insurance, mechanical breakdown insurance, warranties, purchase price protection insurance, assistance insurance and tyre and rim insurance.
ASIC is proposing that an issuer of an add-on motor vehicle financial risk product must, if requested by ASIC, provide the regulator with details of premiums, cancellation rates, claims, provisioning to meet future claims, details of consumers and vehicles covered by the product, distribution channels and details of third parties that provide finance to retail clients for purchase of the products. This information must be provided on a regular basis.
If the product issuer has not met these conditions it cannot issue a product through an intermediary in connection with a motor vehicle purchase.
An intermediary must not arrange for the sale of an add-on insurance product in connection with a motor vehicle purchase if the product issuer has not met the conditions.
There are additional conditions covering online sales, deferral periods and mechanical risk products.
ASIC has reported on the failings of consumer credit and other add-on insurance for a number of years. In a 2018 report, it found that across all add-on insurance products it reviewed over three years, the gross amount returned to consumers in claims was only nine cents for every dollar of premium paid. By comparison, home insurance returns around 55 cents in the dollar.
It said that in many cases customers were sold product they were ineligible to claim on and that in other cases cover was unnecessary as it duplicated existing cover held by customers, including under their comprehensive insurance policies.
Customers were often sold a higher and more expensive level of cover than needed.
Last year the regulator warned that unless consumer credit products were redesigned to provide better outcomes for consumers, it would use its product intervention power.