The Australian Securities and Investments Commission (ASIC) has criticised no-claims discount schemes on motor insurance policies, warning they “do not operate in the way consumers might reasonably expect”.

The regulator reviewed 10 motor insurers, accounting for 32 brands, and found widespread “inadequacies”, misleading practices and poor disclosure.

ASIC’s recommendations are not binding, but Deputy Chairman Peter Kell says it “will continue to monitor” no-claims discount schemes and, if necessary, take regulatory action.

Mr Kell told the Insurance Council of Australia Regulatory Update seminar in Sydney that it expects insurers to “pay close attention to the findings and recommendations in the report”.

ASIC says no-claims discount schemes “create an impression” that a policyholder’s claims history has been separated from other factors determining price. However, it says this is not the case in practice and consumers may not understand the impact a claim can have on premiums.

ASIC notes that making a not-at-fault claim can affect the underlying premium even where there is no effect on the no-claims discount rating.

Making an at-fault claim can affect the underlying premium and the no-claims discount rating.

The report is critical of some common product features, such as the option to purchase “ratings protection”. In theory, this means consumers pay a fee to retain their no-claims discount rating, even when making a claim that would otherwise affect it.

“We found that in some instances the cost of purchasing ratings protection is higher than the benefit obtained by maintaining the… rating,” Mr Kell said.

ASIC also says consumers may not realise full discounts because most insurers apply minimum premiums, which can undermine and limit no-claims discount entitlements. It says the existence and application of minimum premiums is generally poorly disclosed.

The report calls for improved disclosure of no-claims discount schemes’ key elements, “so consumers can make fully informed decisions about purchasing or renewing a particular insurance policy or about making a claim”.

The ICA seminar heard some insurers have shifted – or are in the process of doing so – from the no-claims discount pricing model to one in which assessment of claims history remains a stated factor in the calculation of premiums.

For those that retain the schemes, regulators will be watching.

“ASIC will continue to monitor insurers to ensure they are complying with their obligations to provide consumers with accurate information, and we will take further regulatory action against insurers where appropriate in relation to these issues,” Mr Kell said.