New Zealand’s Commerce Commission says the way add-on cover is sold alongside motor vehicles has created the “potential” for non-compliance and poor consumer outcomes.

The relationships between motor dealers, lenders and insurers add also to the possibility of less than desired consumer results and breaches, the commission said.

The commission – which enforces competition, fair trading and consumer credit contract laws – made the observations in a report examining motor vehicle financing and sales of mechanical breakdown insurance, guaranteed asset protection insurance, credit contract indemnity insurance and repayment waiver products.

Released last week, the report is based on input from five insurers, 15 vehicle financing lenders and 62 consumers who have bought one of the add-on products while taking out loans to purchase cars.

The report says statements from some of the consumers suggest a segment of industry participants may be falling short of their legal obligations to assist them to reach an informed decision about purchasing add-on cover.

A number of consumers either did not understand the add-on product they had purchased or were not aware that they had purchased an add-on at all, the report said.

“We will be meeting with lenders and insurers who participated in the review to discuss our observations and where necessary, we will issue advice about compliance with the relevant laws, including changes to the [Credit Contracts and Consumer Finance Act] which come into force [next month],” Commission Chairman Anna Rawlings said.

“We are also meeting with key industry stakeholders and the consumer advisory sector to share the information we have gathered about add-on products and how they are sold.”

The report says under the most common pricing model, insurers set the wholesale price of add-on insurance products and allow dealers and other intermediaries to place a mark-up on that wholesale price, resulting in the retail price.

“The mark-up is retained by dealers as their commission,” the report said. “Insurers typically allow dealers to place a mark-up of up to 100% on the wholesale price of add-on insurance.

“This means that the retail price paid by the consumer is often double the wholesale price set by the insurer.”

The report says most insurers indicated they do not expect commission earned on each product to exceed 100% of the wholesale price but some also advised they have no system controls to ensure this is the case.

Consumers paid about $NZ548 million ($526 million) in retail premiums for the four add-on products covered by the report in the three years to March 2020 and received about $NZ139 million ($133 million) in claims payouts during the period.

The analysis of the data shows consumers have just 1-15% probability of claiming against and being paid under their add-on policies, the report said.

Click here for the report.