Buying insurance extras from a car
Just when you think you've made all the big decisions about
buying a car or motorbike, the dealer may offer you add-on
insurance. Some of the insurance car dealers sell is not very good
value and you may already have some of this cover.
Here are some facts about the insurance extras sold by car
dealers, to help you only sign up for the cover you need.
What is add-on insurance?
Add-on insurance products are sold by car dealers when you buy a
new or used vehicle. They cover things related to the car (like a
breakdown or damage to the tyres and rims) or to your loan (such as
if you are unable to pay it).
The names of these policies vary and they can be sold separately
or bundled together in a range of different packages.
ASIC's Peter Kell talks about add-on insurance
Listen to ASIC Deputy Chairman, Peter Kell talk
about the sale of add-on insurance policies through car dealers and
how the market is failing consumers.
Interviewer: Hello and welcome to ASIC view,
the official podcast of the Australian Securities and Investments
Commission. On today's episode we'll be discussing ASIC's review
into the sale of add-on general insurance policies through car
Joining me to discuss the review is ASIC Deputy Chairman, Peter
Kell. Peter, thank you very much for your time.
Peter: Happy to be here.
Interviewer: What do we mean at ASIC when we
say add-on insurance?
Peter: These are insurance products that are
sold to consumers when they purchase a new or used car.
They're the sort of extras that you sometimes are offered and
they cover risks relating to the car itself, such as tyre and rim
insurance, which covers you for the cost of repairing or replacing
Or they relate to the loan that the consumer takes out to
purchase the car, such as consumer credit insurance, which covers
you if you have difficulty making loan repayments because you've
Interviewer: So these are things, someone's
buying a car, it's a big purchase and they're looking for extra
bits of security and these are the sorts of products they might buy
when they're doing that?
Peter: Well I think it's often the case of
they're not looking for these extra products but rather after
they've bought a car and maybe taken out a loan to help them buy
the car, they have these extra products pushed onto them. And in
some cases you can end up with four or five additional insurance
products - consumer credit insurance, gap insurance, tyre and rim,
mechanical breakdown insurance. These are the financial products
that can end up costing you a lot of money before you even realise
what you're getting into.
Interviewer: So how did ASIC conduct this
review into add-on insurance?
Peter: We looked at seven general insurers,
that make up more than 90% of this market - the market for add-on
insurance products sold through car dealerships. We got a lot of
detailed data about the way these products operate for three years
- 2013,2014 and 2015.
Interviewer: And, as an overview what did the
Peter: Well I'm afraid the results of our
review are to put it bluntly, appalling. This is a market that is
failing consumers. We found that in aggregate, consumers paid
around $1.6 billion in premiums over the period we looked at, but
received only around $144 million in successful insurance claims.
That represents a very low claims payout of around 9%. And for some
of the major add-on products, such as consumer credit insurance,
the payout was even less, representing around five cents in claims
paid for every dollar that you've paid in premiums.
Interviewer: So just to put that in context,
how does that compare to other more common types of insurance like
basic car insurance?
Peter: It's not necessarily a straight forward
comparison, but to give you a sense, your usual car insurance has a
payout ratio of about 85%, home insurance around 55%, travel
insurance around 44%. In other words, they're all considerably
higher than what we're seeing here, where the amount collected in
premiums wildly exceeds what people end up receiving in claims on
Interviewer: The percentage, as you say, of
claims is single figures. That's the main finding of the review.
What else did the review find in its work?
Peter: Well, while consumers received very
little benefit, car dealers earned $602 million in commissions over
that period, that's more than four times the amount consumers
received in claims and some of the commissions paid to car dealers
to sell the product were as high as 79%.
We also found that payment for these insurance products is often
packaged, or commonly packaged into the consumer's car loan as a
single upfront payment. Now what that means is it not only
increases the cost of the product as part of that amount that
you've got to pay at the start, but it means that you're paying
interest on your premium as well, because it's part of the
We found that consumers are often unaware that they even have
the policy when it's paid upfront as a single premium and in some
cases it means that the total amount that the consumer is paying is
more than they will ever receive or could ever receive if they made
a claim. That's junk insurance.
We also found high pressure selling because of the high
commission payments, which means that it's very difficult for
consumers to understand what they're getting. These are often
complex products, a lot of poorly designed products that are
clearly not being sold with the consumers interests in mind. It is,
as I said, a market that is failing consumers.
Interviewer: You've identified some fairly
serious concerns here, what is ASIC doing to try and change this
behaviour or fix these concerns?
Peter: Well the market has to change. It has to
change dramatically and we're putting general insurers on notice,
the general insurers in this market, that they need to
significantly improve consumer outcomes or they're going to face
further regulatory action.
So at least four broad areas need to be addressed. We want to
see a significant reduction in the amount of commissions paid to
anyone who sells add-on insurance through car dealers, to reduce
that conflict of interest in high pressure sales.
We want to see very significant improvements in the value
offered by these products. They're too expensive given the level of
cover they actually offer and they're poorly designed. That needs
to change, that needs to change now.
We want insurers to stop selling the products through a single
upfront premium. Too often, that simply results in a situation
that is a rip-off for the consumer.
We are also going to ensure that insurers who have provided
policies that are inappropriate for the customer provide refunds.
So for example, where a policy has been sold to a consumer who was
never eligible to claim under the policy, that's unacceptable. That
is a situation where we are going to look for refunds.
We're also going to be making sure that insurers provide ASIC
with ongoing data and information about prices and premiums and
claims, so that we can closely monitor how this industry is
tracking over time.
I will say that the industry has indicated that it recognises
that some reforms are necessary and it's already looking at
implementing a 20% cap on commissions. That's a positive start but
we're going to need to see a lot more.
Interviewer: If, hypothetically, you didn't see
a lot more and these problems continued can ASIC ban these sorts of
products altogether? Is that an option that ASIC would ever
Peter: We will certainly look at all options
that we have to deliver better outcomes. If that means we've got to
take enforcement action, for example, if products have been sold in
a way that's misleading, we will very much have that on the
It's also interesting that the financial system enquiry, the
recent financial system enquiry did recommend that ASIC be given
product intervention powers and also that the responsibilities of
product manufacturers like insurers, that those responsibilities be
lifted and improved. If those reforms were introduced, they would
also help ensure better outcomes in this market.
Interviewer: So if I was a consumer who had one
of these policies, what can I do if I've got concerns, that I have
as you say, junk insurance?
Peter: Well, you may want to consider for a
start, whether you really need the policies that you've been sold.
Ask yourself, check how much you've paid and what is covered, and
if you find out for example that you're not covered for what you
expected, or even worse, you're not even eligible to claim, then
ask for a full refund for the insurer and if you don't get a
satisfactory answer, well there's a Financial
Ombudsman Service to go to.
It's also a situation where you may want to consider contacting
the Consumer Action Law
Centre who are concerned as well around the sale of these sorts
Interviewer: And they have a website, demandarefund.consumeraction.org.au
that people can visit if they are concerned. Peter, thank you very
much for your time this afternoon.
Peter: Thank you.
Interviewer: And we'll be back with more
episodes of the ASIC podcast very shortly. Thank you very much for
Subscribe to ASIC View podcast on PodBean.
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Types of add-on insurance
Consumer credit insurance
Consumer credit insurance (CCI), also known as 'loan protection
cover' or 'repayment cover', provides some cover if you can't meet
the repayments on your loan if you lose your job, are sick, injured
CCI is often sold in bundles and can include some or all of
these types of insurance:
- Car yard life insurance - covers the reducing
amount owing on your car loan if you die and your dependents want
to take ownership of the car.
- Sickness and accident insurance - covers some
or all of your car loan if you become disabled or sustain injuries
that prevent you from working.
- Unemployment insurance - covers your car loan
repayments for a short period (usually 3 months) if you lose your
To find out more, see our page on consumer credit
Comparing the cost of life insurance
Our cost of life insurance
infographic shows that you can pay up to 17 times more for life
insurance purchased from a car yard than you would if you bought
standard life insurance from a life insurance company or super
Do you need consumer credit insurance?
Check what cover you already have before you buy consumer credit
insurance. If you have a job you will probably have some standard
life insurance with your super
life insurance, when you die your payout will go to your
nominated beneficiaries, whereas with consumer
credit insurance, the payout will go to your lender. The payouts
from standard life insurance usually remain constant whereas your
payout with CCI will reduce with the loan balance.
Read ASIC's report, The sale of life
insurance by car dealers: Taking consumers for a ride, to see
out what ASIC found when they researched the add-on insurance
policies sold by five life insurers in car yards.
Gap insurance or loan termination insurance
Gap insurance (also called 'motor equity insurance' or
'shortfall insurance') covers the lender for the difference between
what you owe on the car loan, and what the car is insured for under
comprehensive car insurance, if you write your car off.
Loan termination insurance (also known as 'walkaway insurance'),
covers the difference between the value of your car and the amount
outstanding on your loan if you return the car because you can no
longer make the repayments due to illness or injury.
This type of cover can be very limited as it might only cover
you for accidental death (for example, if you are hit by a car),
not death as the result of an illness. Also, the amount paid will
be capped, and you don't get to keep the car as it will have to be
returned to the dealer.
Do you need gap or loan termination insurance?
Before you get gap insurance, check your existing car insurance
cover. If you have a comprehensive car insurance policy and write
off your car, you will receive a payout and, although the payout is
based on either an agreed value or
market value, it should cover all or most of your loan.
If your comprehensive policy covers the whole amount of your
loan, or your comprehensive insurer rejects your claim, you won't
receive a payout from your gap insurer. This means your premiums
will have gone to waste.
Also keep in mind that both the value of the car and the amount
owing on your loan will reduce over time, so the longer you keep a
gap or loan termination policy, the less likely you will receive a
payout from your gap insurer.
Check the policy exclusions. If something were to happen to you
and you couldn't pay the car loan, would you or your dependents
want to keep the car? Loan termination insurance won't let you do
This is an extension of the warranty offered by the manufacturer
or the statutory warranty for new or used cars. It generally covers
original components and fittings at the time of purchase against
mechanical failure or defect.
Do you need an extended warranty?
Under the Australian Consumer Law automatic consumer guarantees
apply to a car regardless of any other warranty the dealer sells or
gives you. The specific details of automatic consumer
guarantees vary slightly by state but, in most cases, they should
continue to apply after the warranty has expired.
Find out more about consumer
guarantees on cars on the ACCC website.
Tyre and rim insurance
This covers damage to tyres and rims that occurs as a result of
blowouts, punctures and various road hazards (like driving through
a pothole). General wear and tear is usually excluded from tyre and
rim insurance coverage. See our tyre and rim insurance webpage
for more details.
Mechanical breakdown insurance
This provides some cover for the repair or replacement of
specific parts of your car if you suffer an unexpected mechanical
failure. See our webpage mechanical breakdown
insurance for more information on it is, and what you should
look out for.
Things you should know before
taking out add-on insurance
Before you sign up for add on insurance, here are some important
things to consider:
- Commissions - Car dealers often get paid
a commission of between 20-70% for selling you add-on insurance
policies. Because their level of commission is so high, the dealer
might not provide you with a policy that is in your best
- Value for money - Add-on policies sold
through car dealerships are usually far more expensive than
policies sold through insurance brokers, banks and super funds. As
well, they only insure you for a limited range of situations, so
there is only a small chance you will be paid out. And the payouts
may be low compared to the premiums you have paid.
- How you're charged - Most add-on insurance
premiums are packaged into your car loan. This means you pay
interest on the premiums and this makes the insurance even more
expensive and adds to the amount you have to borrow.
- Cost breakdown - Some lenders and credit
providers will only tell you the cost per month. Ask for the full
cost of the policy, including the cost of any interest payable on
- Payout - Will the payout be higher than your
- Excess - Will you have to pay an excess
if you claim on the policy, and how much will it be?
- Cooling off period - Is there a cooling off
period where you can cancel the policy at no cost if you decide you
don't need it?
- Claims - There may be only narrow
circumstances in which you can claim, so check what you can claim
- Limits - For consumer credit insurance you may
only be paid a percentage of the outstanding balance of the car
loan and payments may stop after a fixed period.
- Exclusions - Consider the restrictions on
the policy. You may not be able to use the policy if you have a
pre-existing medical condition, are above a certain age or your car
has exceeded mileage limits.
- Refunds - If you cancel the add-on policy
because you pay off the loan early or no longer want the policy,
you will usually receive a partial refund, but it will often be
less than the unused portion of your policy.
Be prepared for the hard sell
Buying a car can be a long process. You can spend hours
negotiating with sales people, making endless decisions about
fittings, finishes and extras, not to mention filling in
Avoid decision overload and make sure you:
- arrive with a clear idea of what insurance extras you do and
- stick to your guns and don't be 'upsold' if you don't want
what's on offer.
- avoid making emotional decisions - buying a car is exciting but
it's important to stay calm and logical.
- ask questions. If you're unsure about anything don't be afraid
to ask. Salespeople often only tell you the positives, but feel
free to ask about things like exclusions. It's your money after
Read ASIC's report: Buying add-on
insurance in car yards: Why it can be hard to say no, which
analysed the experience of consumers who are sold add-on insurance
by car dealers.
Refunds for unfair sales of
ASIC has identified unfair conduct by a number of insurers who
offer add-on insurance and extended warranties through car dealers
or finance brokers. As a result, the insurers agreed to refund over
$120 million to customers who were sold these products
For information, and to check if you're eligible for these
refunds, visit our webpages:
How to make a claim, cancel or
complain about add-on insurance
Making a claim
To make a claim on your policy you'll need to follow the steps
outlined in your product disclosure statement (PDS). If
you are going to make a claim, it's best to lodge it as soon as
Cancelling a policy
You can cancel a policy at any time by contacting the insurer
directly. Details about how to cancel will be in your policy's
All policies allow a cooling off period, which is usually around
30 days. If you cancel during the cooling off period, you should
receive a full refund of the premium.
If you cancel outside the cooling off period, you will usually
receive a partial refund (calculated to a formula) and you may need
to pay a cancellation fee.
Complaining about add-on insurance
If you bought add-on insurance and think the way the policy was
sold to you was unfair or your insurer rejects your claim, and you
wish to make a complaint you should firstly contact the provider's
internal dispute resolution department.
If the provider rejects your complaint, or it remains unresolved
for 45 days or is not resolved to your satisfaction, you can
complain to the Australian
Financial Complaints Authority (AFCA) on 1800 931
Most add-on providers are a member of AFCA, which is an
independent body that can help resolve your complaint. However,
some warranty providers, including car dealers, are not members of
AFCA. This means you will need to negotiate directly with the
For tips on lodging a complaint, see how to complain.
Buying a car is a big decision, and the choices
and decisions that come with it can be overwhelming. Make sure you
understand what you need to know to safely navigate the process and
make the best choice for your needs.
Last updated: 10 Dec 2018