Australian Securities and Investments Commission (ASIC) Chairman Greg Medcraft has warned insurers to raise their game on poor-value add-on insurance sold to people buying vehicles from dealers.

He told the Insurance Council of Australia (ICA) annual forum in Sydney on Friday the industry’s response to concerns raised last year has so far “fallen short”. ASIC found the products had an overall claims ratio of just 9%, with car dealers receiving four times more in commission payments than consumers receive in claims. Commissions are as high as 79%.

“These findings are, to put it bluntly, shocking,” Mr Medcraft said. “Insurers have designed complex and extremely poor-value products, and put their reputations at risk. And some of the most vulnerable consumers in society are paying the price.

“We are pleased to see industry engaging on these issues, but overall the proposals fall short of addressing the underlying issues in this space.

“So you shouldn’t be surprised to hear me say that our work on add-on insurance continues, and we will look to use our full range of powers to seek better consumer outcomes.”

Mr Medcraft says potential solutions include introducing a deferred sales model; raising training standards; holding insurers to account; enforcement action against insurers that breach the law; and public reporting on individual insurer outcomes.

Insurers had proposed a 20% cap on insurance commissions paid to car dealers, but the Australian Competition and Consumer Commission (ACCC) intends to reject this, according to a preliminary ruling.

The ACCC says consumers are focused on buying vehicles, not insurance, and the sales environment involves high-pressure selling tactics, a lack of adequate information, very high commissions and conflicts of interest.

“A cap on commissions does not address these issues and will not remove the opportunity and incentive for insurers and dealerships to sell consumers expensive, poor-value products,” Chairman Rod Sims said.

He says a cap may delay development of more effective solutions.

Insurers lodging the application to the ACCC included Suncorp-owned AAI, Japanese-owned Aioi Nissay Dowa, Allianz, CGU, motor-focused Eric Insurance, Hallmark and QBE.

The ACCC expects to reveal its final decision next month. 

ICA says it takes the problems identified by Mr Medcraft seriously, and insurers are “committed to delivering better value”.

“Insurers maintain that a cap is necessary to improve consumer outcomes from the sale of add-on insurance,” CEO Rob Whelan said. “ICA and its members will seek discussions with the ACCC to see how insurers may be able to allay its concerns about the impact of a cap on customers and industry competition.

“ICA and its members remain engaged in discussions with ASIC and consumer advocates to refine a range of other initiatives proposed by insurers to increase the protection and value consumers receive from add-on products.”