On 12 September 2016 ASIC released Report 492 following its review of the sale of add-on insurance products by car Dealers. In its report, ASIC claims it has found that the ‘add-on insurance policy’ market sold through car Dealers is ‘failing consumers’. ASIC’s report comes following two other reports about add-on insurance products released in February 2016 and an ongoing investigation by ASIC into the pricing, design and sale of add-on insurance through motor vehicle Dealers.
In response to ASIC’s report, nine companies representing life insurance and general insurance providers, who together account for the bulk of add-on insurance products sold through motor vehicle dealerships, have applied to the Australian Competition and Consumer Commission (ACCC) for authorisation to enter into a cartel arrangement to implement a proposal to limit commission and other payments or benefits paid to motor vehicle Dealers for the distribution or sale of add-on insurance products.
The insurers’ proposal is to limit total commissions on all add-on general and life insurance products distributed through the motor vehicle dealership channel to 20%. This includes any financial or other benefit in nature of a commission, and any form of monetary consideration. It would also include payments and benefits that may be described as ‘sign on’ payments, marketing or advertising subsidies or management fees. It would not apply to government charges or genuine reimbursements of expenses such as education and staff training.
The insurers’ view appears to be that it is ‘inappropriate sales practices’ which are the root of ASIC’s concerns, rather than the add-on insurance products themselves. The insurers’ proposal appears so far to be limited to the delivery channel of add-on insurance products, rather than making any wholesale changes to the products themselves.
The ACCC may, under the Competition and Consumer Act, allow businesses to engage in an anti-competitive arrangement (such as a ‘cartel arrangement’) if the ACCC is satisfied that the public benefit of that arrangement will outweigh the public detriment. Decisions on whether to authorise are made by the ACCC following a public consultation process and a draft decision. The final decision must be made within six months of an application (in this case, by 12 March 2016).
The insurers’ application to the ACCC states that authorising an arrangement by insurers to cap commissions paid to Dealers would have a ‘tangible public benefit’ by reducing incentives from improper sales practices and helping to ensure that add-on insurance products are sold to customers who want them and can benefit from them.
The insurers’ application also states that any detriment caused by the proposed arrangement is likely to be private, not public. Given that ASIC’s report found that commissions paid to motor vehicle Dealers for the sale of add-on insurance products could be as high as 79% in some cases, if the insurers’ proposed 20% cap goes ahead, it may have a significant impact on the revenue streams of motor vehicle Dealers. We are not aware of ASIC having released any data on the level of commissions paid through other distribution channels such as banks, credit unions, salary packaging companies or on other products such as residual value and redundancy insurance.
The ‘private detriment’ may, however, extend to insurers insofar as the proposed cap on commission may allow insurers to lower prices of existing add-on insurance products – as costs savings made from paying lower commissions to Dealers could be applied to reduce the cost of the add-on insurance products to consumers. However, there is nothing in the insurers’ proposal which would force insurers to lower prices to consumers. This means that the proposal could lead to an increase in profits for the insurers as any commissions above the proposed 20% cap could just be retained by the insurers at the expense of Dealers.
It is unclear exactly how the 20% cap on commission will be implemented or enforced (assuming it is authorised by the ACCC). However, the insurers’ proposal is to attempt to implement the cap through a voluntary code of conduct entered into between the insurers, with any insurers who do not sign up to a voluntary code of conduct to be reported to the ACCC.
The insurers have proposed that the 20% cap on commissions comes into effect three months after the date that final authorisation is granted and applies for 10 years or until such earlier time the arrangement is superseded by another mechanism.
Whilst the insurers acknowledge that there will be a detriment to Dealers in the form of reduced commissions, their submission to the ACCC states that, ultimately, Dealers will be better off if the proposed cap is authorised. The reason for this, according to the insurers’ submission, is that taking no action to address ASIC’s concerns risks there being a legislative response to prohibit the sale of add-on insurance products at the point-of-sale.
The insurers point to the example of the United Kingdom, where the sale of payment protection insurance is prohibited until seven days after a loan has been taken out. This, according to the insurers, is a risk to both Dealers and consumers, by taking away a commercial opportunity to the Dealer and leading to ‘under-insurance’ of the consumer.
The insurers’ submission is limited to the motor vehicle dealership distribution channel. The insurers have not proposed to lower commissions paid for the sale of the same add-on insurance products through any other distribution channels – such as finance brokers, novated lease or salary packaging companies.
ASIC has publicly acknowledged that a cap on commissions would be supported, and might make add-on insurance products cheaper. However, while ASIC has expressed concerns at issues it sees as present within add-on insurance distribution channels. ASIC’s report also expresses concern at the benefits which the add-on insurance products themselves ultimately confer on consumers (or lack of any benefit). ASIC has also stated that, in its view, the capping of commissions to motor vehicle Dealers is not a panacea and will not, without further action, address problems ASIC regards as inherent in the general market for add-on insurance products.
ASIC has given the sale of add-on insurance products a significant amount of focus in 2016 following a three- year investigation without any consultation with AADA. Its review of the market is ongoing and does not seem to be abating with the release of this Report or the insurers’ response.
Finally, notwithstanding the insurers’ application for authorisation to enter into a cartel arrangement, the insurers’ application states that this is a precaution only, and that no admission is made that the arrangement proposed would necessarily amount to cartel conduct.
AADA has been invited by the ACCC to make a submission in response to the insurers’ application to the ACCC and has been engaged in discussions with both ASIC and the ACCC.
This article was written by Evan Stents – Lead Partner and Christian Teese – Senior Associate, Automotive Industry Group | HWL Ebsworth Lawyers.
Lead Partner, Automotive Industry Group | HWL Ebsworth Lawyers