Only $6 million was paid in claims from life insurance policies sold through car yards in the four years to 2014, according to the Australian Securities and Investments Commission (ASIC).

A new report on car dealership distribution says the sum accounts for only 6.6% of the $90 million paid in premiums in the period.

“We consider that the very low claims outcomes are a reflection of the wider systemic problems identified in this report,” ASIC said.

“This includes poor pricing and design. Car yard life insurance is significantly more expensive than term life insurance or consumer credit insurance purchased through another channel, such as authorised deposit institution-distributed life insurance, and single-premium policies add to the cost.”

Such policies are valid only for the duration of an insured’s car loan, and are usually sold to younger people.

ASIC argues these age groups do not need life insurance, because they have no dependents.

But it also criticises insurers for not covering the full amount of the loan, saying if there is a claim the insured’s estate may have to sell the car to cover the difference.

The report also assumes younger people will have life insurance in their super funds.

ASIC says high rates of cancellation for this type of life cover “also contribute to the low level of claims, because the result is that the period during which the insurer is at risk of a claim is shorter than the contracted period, reducing the probability of any claim”.

The regulator also has premium levels in its sights, arguing car yard life insurance costs three times more than term life cover. ASIC bases this comparison on a 40-year-old male smoker with a loan of $50,000 over four years.

ASIC will further scrutinise life insurance sold through car yards, and will probably review commissions paid to car dealers and intermediaries.

“Primarily we are concerned about the high sales rate, despite the widespread availability of cheaper products,” the report says. “We will continue to monitor the practices of individual insurers that sell car yard life insurance.”

ASIC says if insurers do not change the way this type of life cover is sold, it will take enforcement action.

“Given these findings, insurers will need to review and make positive changes to both the design and value of car yard life insurance, including the level of supervision of their authorised representatives, if this product is to provide value to consumers and meet their needs.”

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