allianz swann
Carsales Staff22 Sept 2018
NEWS

Insurers under fire for dealer 'add-ons'

Consumers pressured to purchase cover by dealers receiving 50 per cent commission

The general insurance industry has this week fallen under the baleful gaze of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

And although it's household insurers who have endured the heaviest burden of the Commission's interrogation, automotive insurers Allianz and Swann Insurance have also faced some tricky questions. Allianz was up first, followed by IAG, Swann's parent company. And the Insurance Council of Australia, representing the country's general insurers, was also placed in the position of defending itself before the Commission.

It all started on Tuesday, when Lori Callahan, Allianz Australia chief risk officer was grilled by Senior Counsel assisting the royal commission, Rowena Orr QC.

"Does Allianz acknowledge that its conduct in relation to dealer add-on insurance products described in the submission fell below community standards and expectations?" Ms Orr asked, receiving an affirmative response from Ms Callahan.

In a submission to the Commission back in January, Allianz had admitted a number of points, as follows:

"Allianz has agreed with ASIC that there are groups of dealer customers which may have obtained Allianz insurance products through this general advice model which are not suited to their individual circumstances and that a level of remediation is called for.

"Some customers purchased both gap insurance and comprehensive motor insurance from Allianz on a new vehicle where the comprehensive motor insurance included an element of replacement cover which could reduce the need for gap insurance.

"Some customers purchased gap insurance with no finance gap at the point of sale and so were unlikely to have needed the product.

"Some customers who purchased consumer credit insurance were, due to their own circumstances, unlikely to have needed the product or unlikely to have been eligible to claim on part of the cover, and some customers who purchased tyre and rim insurance or an extended warranty product were unlikely to have been eligible to claim on the cover."

Ms Callahan was appointed to the committee with responsibility for oversight of the submission. Around 2000 dealers and financial institutions were authorised to sell Allianz insurance products to consumers.

Later that day, IAG's executive general manager of business distribution Benjamin Bessell appeared before the Commission. During this appearance, Bessell acknowledged that commission for gap (guaranteed asset protection) insurance ranged from between 40 and 51 per cent of the premium. And any dealer writing $1.2 million worth of business would receive an additional incentive of $150,000 from Swann.

"Do you know of the payments made by Swann to dealers, what percentage of the payments were made under the standard commission arrangement and what percentage were made under an incentive arrangement?" asked Counsel Assisting Mark Costello.

Bessell replied that he did and the number of arrangements that fell outside the 'standard authorised representative agreement' was "approximately 30 per cent".

"My understanding was that these were offered to to dealers that we felt could grow, were possibly a new client of the business. So there was an incentive there for them to – to grow and be incentivised for growing with Swann.

"And I also think there was a – an element of market forces here where in a competitive market these types of agreements were not uncommon, and if we were to keep a – keep a – a business or an authorised representative or obtain one, these are – these agreements would need to be put in place."

Costello reconfirmed with Bessell the following day that agents' commissions are supposed to be capped at 20 per cent of any insurance premium payable.

"And you’re also aware that IAG notified the Commission, on 29 June this year, that
Swann made payments to 34 authorised representatives which may have exceeded the 20 per cent cap?" Costello continued, to which Bessell replied: "Yes, I’m aware of that."

Furthermore, as Costello's questioning continued, it became clear that IAG and Swann didn't actively maintain effective oversight of the "3000 authorised representatives around the country" selling insurance. Costello's probing also elicited that the dealers acting as Swann agents were already receiving commissions for the sale of motor vehicles (and often finance packages) to the same customers.

Without an acceptable level of oversight, there was no way Swann (and IAG) could be certain that the dealers were complying with financial services law.

ASIC, the Australian Securities and Investments Commission, had informed IAG of its misgivings as far back as 2013 that 'add-on' insurance was not providing any clear benefit for consumers. As a consequence, Swann Insurance has undertaken to reimburse $39 million to nearly 68,000 policyholders.

For its part, Allianz anticipates a settlement altogether costing the insurer $45.6 million reimbursed to add-on policyholders.

Yesterday, Robert Whelan, CEO of the Insurance Council of Australia appeared before the Commission, and the ABC reported that he was playing a very defensive game.

"Working within the ICA's legal constraints, I think we did as much as we could," Whelan was quoted as saying by the ABC.

"The steps you took were just to build a consensus," Ms Orr retorted.

"We have limitations in the actions we can take..." Whelan responded. "We are a member-based company, it's voluntary and for us to enforce upon member to withdraw from a market or change a product is really outside the powers that we have. We're not a regulator."

That much is true, and places the onus for oversight of the insurance industry back where it belongs – on ASIC and APRA (the Australian Prudential Regulation Authority).

But Whelan did the ICA no favours by offering this piece of victim shaming, true though it might be:

"People have an optimism bias – that these things are not going to happen to them.

"We're trying to find ways to inform customers about what risks are most likely to affect them."

Transcripts are online for Tuesday and Wednesday. IAG has issued a statement in anticipation of the Commission's findings on its website, and Swann Insurance has set up an FAQ concerning add-on insurance, including the types of cover that fall within the definition:

Guaranteed Asset Protection (GAP)
Loan Protection Insurance
Walkaway Insurance
Protection Plus Insurance
Tyre & Rim Insurance
Purchase Price Protection (PPP) Insurance

Share this article
Written byCarsales Staff
See all articles
Our team of independent expert car reviewers and journalistsMeet the team
Stay up to dateBecome a carsales member and get the latest news, reviews and advice straight to your inbox.
Disclaimer
Please see our Editorial Guidelines & Code of Ethics (including for more information about sponsored content and paid events). The information published on this website is of a general nature only and doesn’t consider your particular circumstances or needs.

If the price does not contain the notation that it is "Drive Away", the price may not include additional costs, such as stamp duty and other government charges.
Download the carsales app
    AppStoreDownloadGooglePlayDownload
    App Store and the Apple logo are trademarks of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.
    © CAR Group Ltd 1999-2024
    In the spirit of reconciliation we acknowledge the Traditional Custodians of Country throughout Australia and their connections to land, sea and community. We pay our respect to their Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples today.