Geoff Atkins
Sale of so-called ‘add-on insurances’ has been widely criticised in Australia for some time. Here’s why:
- High pressure sales methods
- Poor value products, poorly understood
- Sometime a consumer is not even able to claim on the product
- Very high commissions for distributors
- Difficulty for buyers in making a considered decision
Regulatory scrutiny has been intense and regulatory action is well and truly underway – the extent of the customer remediation programs revealed by ASIC gives some evidence of this. However, there is still a long way to go before we have a confirmed regulatory approach to these product areas and the relevant markets have adjusted (or possibly disappeared).
What aspects of the changes are still unknown?
- What products, distribution arrangements and customers will specific add-on provisions apply to?
- In particular, in what situations will the deferred sales model (DSM) be required?
- What will be the rules for the deferred sales model(s)?
- Is the anti-hawking reform relevant and how does it interact with the deferred sales model?
- Where do the Product Design and Distribution Obligations and the expected low value product regime fit in?
The Product Dimension – What ‘add-on insurance’ should be regulated?
Conceptually defining add-on insurance is not difficult – it is an insurance policy sold alongside a primary purchase of a product or service, including a credit product. This is not the same as saying that all such products should have extra regulation – at a detailed level the regulatory perimeter will need to be set with specificity.
The Code Governance Committee for the GI Code of Practice published a report in 2018 Who sells insurance? that identified more than 20 add-on products. An example along with our views on the potential regulatory boundaries is:
Logically, one could see circumstances where an add-on product sold through one channel does not risk consumer detriment while the same product sold through another channel could. We think it is unlikely, though, that the regulatory boundary will consider different selling situations.
Deferred sales
The extent and details of a DSM(s) is the topic of greatest immediate concern. Commissioner Hayne recommended that a Treasury-led working party develop the model “as soon as is reasonably practicable” – is this likely to take three months or three years?
In the meantime people are considering the following sources of comparison:
(a) The new (1 July 2019) Code of Banking Practice
(b) ASIC’s earlier discussions and consultations
(c) The UK models for CCI and GAP.
The Banking industry has bitten the bullet and included a series of requirements for CCI including a four-day deferred sale of CCI on credit cards and personal loans (Chapter 18 of the new COBP).
ASIC’s 2017 report into car-yard sales gave a thorough explanation of the perceived issues. A subsequent Consultation Paper 294 on DSM for motor dealers postulated anywhere from four days to 30 days deferral and possibly longer for extended warranty because the product does not give cover until other warranties have expired.
Learnings from the UK
The Treasury working group will undoubtedly look to overseas experience to guide its deferred sales model.
The UK has acted on deferred sales for two products – CCI (called Payment Protection Insurance or PPI in the UK) back in 2011 and Guaranteed Asset Protection (GAP) in 2015.
The deferral periods are seven days for CCI and four days for GAP, although the consumer can voluntarily complete the purchase after one day. There are other detailed aspects to the rules such as the information that must be given to consumers and the ability to buy the products stand-alone.
The UK Financial Conduct Authority reviewed the effects of the GAP legislative change in 2018 and came to the conclusion that under a deferred sales model:
- Customers engaged more with the decision-making process and the number of consumers who shopped around more than doubled;
- Add-on GAP insurance sales were 16% to 23% lower than previously because customers had the chance to decide whether they actually wanted GAP insurance; and
- GAP insurance prices are on average 2% to 3% lower than previously, but a stand-alone product still has an average premium less than half of an add-on product.
Other important findings included:
- The sales person still plays an important role in convincing consumers to buy add-ons like GAP (while salesperson influence dropped, it retains equivalent importance to other factors such as convenience);
- Attempts to break the point-of-sale advantage for ‘sold’ product are more likely to reduce total purchases, rather than divert consumers to the stand-alone.
- Add-on sellers play an important role in introducing the product to buyers, and standalone sellers tend to rely on add-on sellers introducing the consumer to the ‘concept’ of the insurance (in the absence of add-on sellers, the stand-alone market may be smaller and/or would need to invest more in sales).
While there is no certainty that the effects of a deferred sales model will play out in the same way in Australia, the UK results suggest that consumers experience better outcomes because they have more choice as to what they purchase and time to decide if they want the insurance.
We were surprised that the drop in sales volumes for GAP was not greater. With premiums remaining flat, we would expect the higher selling costs to have reduced margins for distributors and insurers.
There are other weapons in the regulatory arsenal
While attention is currently focused on a deferred sales model, there are other regulatory tools to deal with add-on insurance.
The anti-hawking recommendation might have a major impact on add-on sales depending on how the scope of anti-hawking is defined. It would be highly desirable that they are part of the same set of regulatory provisions rather than being independent (and possibly inconsistent) requirements.
The other important regulatory intervention for add-on insurance is the product design and distribution obligations, already legislated and effective in April 2021. Add-on products will be challenging for design and distribution obligations, and we expect will need to include a framework for assessing whether a product is of ‘low value’ to some or all consumers.
Finity’s view:
More regulation of add-on insurances has been flagged for some time and we are already into implementation, but still with many unanswered questions.
Most distributors and insurers have decided whether they see add-on insurance as part of their future business models, but for those deciding to continue there is much work ahead. The known withdrawals from the market so far seem to have been driven by reputation risk.
We expect most market participants (distributors and the specialist insurers) to adapt rather than withdraw. Selling costs will be higher (that is expenses not commission) and margins will be thinner.
DSM regulations should be applied to a narrow range of products, not all add-on insurances. Our reasons are firstly that there is a risk of onerous changes being applied that are against consumer interests rather than protecting them, and secondly that the DDO and ASIC’s Product Intervention Powers are a more nuanced set of measures that should focus directly on consumer interests.
The Fold’s view:
We agree with Finity’s view as set out above.
We also note that in our opinion, any withdrawals from the market will not take place as a result of the deferred sales model, but as a combination of other changes to the legislative environment, such as the design and distribution obligations.
We take this position because the obligations imposed under a deferred sales model are likely to be less onerous than being required to design a product for targeted markets or re-design a product to ensure that it is not unfair or is consistent with revised duty of disclosure requirements.
We think it is important for the industry to be heavily involved in any consultation on this recommendation. As there has been no prior consultation or discussion about regulating add-on insurance outside the motor dealer channel, we think it is unlikely that the regulators will have yet formed a view or have much prior exposure to the multitude of distribution channels and the differences in selling models in the market. For this reason, the industry should assist in shaping the regulation.
We also think it is appropriate for this recommendation to apply narrowly at first (ie only in relation to a limited range of types of insurance) and then gradually implemented in relation to other types of add-on insurance (as appropriate) to make it less likely that there will be unintended consequences, such as consumer detriment, from these changes.
By Geoff Atkins and Jaime Lumsden Kelly
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