Beware the consumer credit insurance rip-off

The pokies have a better payout ratio than this product

It’s Saturday afternoon and you’re celebrating the purchase of your dream car. You were able to stitch up the financing on the spot. Along with it you bought some insurances – one for tyres and rims, one to extend the warranty and something called CCI. They were all rolled into the loan.

You can see the problem: months spent choosing the car, a morning spent on Canstar’s website checking car loan interest rates and zero minutes spent researching CCI.

CCI is consumer credit insurance. Most of it is sold when you take out a car loan, personal loan or credit card.

It is sold by car dealerships, banks, credit unions and building societies. It is bought without thought by consumers caught up in the excitement of getting “approval” for the car or loan they wanted.

It is meant to cover your repayments if you lose your job or can’t work due to illness. Like all insurances, there are terms and conditions and exclusions.

Chances are the deal isn’t great. Yes, some people make claims but the Productivity Commission, which is looking into competition in the financial system, estimates the payout ratio is 21¢ to 28¢ in every dollar of premium. The pokies pay out better! By comparison, the payout ratio for car insurance is 83¢ to 98¢ per dollar.

A huge number of policies have been sold to people who were never eligible to claim or who became ineligible but kept paying. The watchdog ASIC estimates that 257,000 consumers will receive refunds amounting to $122 million for this reason!

There is a proposal for a deferred sales model that will not allow CCI to be sold until four days after the loan is made. It’s welcome, as consumers will think twice; providers will see sales plummet.

ASIC and the Productivity Commission have investigated the product, and it’s on the banking royal commission’s list. Interestingly, Commonwealth Bank withdrew its product in the week leading up to the commission.

Canstar lists 69 brands of car and personal loans on its website and all but nine say they provide CCI. We expect that number to fall.

Steve Mickenbecker, Canstar’s group executive, financial services