Rotten insurance and rotten loans
OPINION: Don’t buy insurance from a used-car salesman unless you want to be victim of what may well be the country’s least competitive market.
Prompted by protests from financial mentors, the Commerce Commission researched the car finance ‘‘add-on’’ insurance market.
This is the market of loan repayment and mechanical breakdown insurance policies, which are often sold by car dealers to people buying second-hand cars from them.
The commission found staggeringly unsuspecting used-car buyers were being sold very poor-value insurance.
In the three years of the study, 15 insurers admitted collectively selling an average of 153,918 add-on insurance policies each year, collecting annual premiums of $148 million, on which just $43m in claims was paid.
There were also 39,448 ‘‘repayment waivers’’ sold each year.
These waivers, which have similarities to loan repayment insurance, are supposed to kick in when people are not able to work, and cannot meet their repayments.
However, on annual premiums of about $35m for repayment waivers, just $4m of loan payments are waived.
The facts of this market are grim.
The car dealers care about the commission they are paid for selling the policies.
The insurers rely on the dealers to sell their insurance, and so compete to get them to sell their policies.
The car-buyers’ interests are not a priority.
The result is high commissions, and poor value for money.
Buyers probably think they are doing the right thing in taking on insurance, but if they knew what bad value it was, they’d be so insulted, they wouldn’t take it.
The ‘‘add-on’’ insurance and waivers are hard to claim on, but until the financial mentors’ protests, no one in power showed much interest in the poorer folk sold this junk insurance.
This is ironic. Not only have we passed laws to protect poorer people from
unscrupulous lenders, but we hounded banks until they stopped selling rotten value payment protection/credit card insurance.
Loan repayment insurance is not a terrible idea in itself.
Going into debt is a big risk, especially on a costly, depreciating asset like a car.
However, if the value of loan repayment insurance is a function of backroom deals between insurers and car dealers over commission, then we need to set minimum standards.
I hate to tell you, but this is not the only uncompetitive horror used-car buyers are exposed to.
Car dealers also often sell the loans that buyers use to pay for cars. Lenders give dealerships base rates for loans, and the dealers choose how much they add to the base rate.
Say a dealer’s base rate is 15 per cent for loans. A dealer might add 9 per cent to that, or 2 per cent, or 5 per cent, or 3 per cent.
This is called ‘‘flex commission’’ and it’s banned in Australian and the United Kingdom because it’s unfair, and it penalises people with low financial knowledge. A lender who does not allow large mark-ups will not do much business.
Insurance ‘‘add-on’’ commission also flexes.
So what should we do?
We need to set minimum standards for loan repayment insurance and waivers.
And we need to force dealers, insurers and lenders to tell buyers the range of interest and commission they could charge on loans and insurance, and the amount they intend to charge. We need to have all parties disclose this information on their websites.
That would spark a few lively conversations, and give competition a wee kicker.
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