Finance

Add On Insurance Products – Creating Clarity and Removing Conflicts

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In September this year the Australian Treasury published a proposal paper outlining potential reforms to the sale of add-on insurance products. This is an issue that has attracted considerable attention in recent years from ASIC, the Productivity Commission and, most recently, the Hayne Royal Commission. Of particular issue were practices of pressure selling, poor claims ratios and low levels of consumer engagement.

So, what is add-on insurance selling? Aspect Underwriting explains.

Essentially, it involves companies selling one product – be it banking products, cars or retail goods, and pressuring consumers to take an insurance product on the back of their purchase or sign up.

The Hayne Royal Commission highlighted the fact that the sales process for add-on insurance negatively impacts the ability for consumers to make informed decisions. The tactics used by call centre operatives, with no relevant qualifications to provide advice, are often driven by sales incentives and result in poor outcomes for consumers.

Similarly, ASIC’s review of the practice found that add-on insurance generally provides poor value for consumers with respect to claims ratios. That is, these insurance products regularly result in low claim payouts, and are both poorly designed and of poor quality.

Finally, the various reviews have identified that add-on insurance, because it is a secondary product to the primary purchase or financing agreement, is often poorly serviced with respect to customer and consumer engagement. Further, consumers who taking products and services where they are offered add-on insurance, are often not in a good position to assess the risks, benefits and quality of the product.

The Australian Government is considering the introduction of a deferred sales model approach to add-on insurance products which provides consumers with greater opportunity to assess the proposed insurance product in the stand-alone insurance market.

This is a welcome development. For those reputable insurers operating in the open market, the pricing, quality and performance of insurance products is core to their operating proposition. Regardless of price, an insurance product is only as good as its performance in the event that it is needed. That means higher claims ratios made against a better understanding of the client’s individual circumstances and requirements, from an insurance product that is designed to protect against adverse outcomes. It also means active and expert customer service to ensure the product continues to suit the customer’s needs.

Reputable insurers don’t want to see situations arise where a poorly designed insurance product, which is not fit for the client’s requirements, means that when an adverse situation does arise the client does not receive the insured benefit. It is bad for the customer and bad for the sector. These latest developments from the federal government are welcomed by the broader insurance industry.

ATO Paper: https://treasury.gov.au/sites/default/files/2019-09/c2019-t408984_-_tsy_proposal_paper.pdf

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