Salvation Army begs for curbs on car dealers selling 'junk' insurance

Wednesday, 15 June 2022

Car dealerships make a lot of money selling add-on insurance, on which they earn large commissions.

The Salvation Army says car dealers should be prevented from selling dodgy “add-on” insurance policies to people on the day they buy a secondhand car.

It also says there should be a cap on the commission car dealers can get from insurers for selling “gap” insurance, mechanical breakdown insurance and loan repayment insurance, all of which were damned as poor value in a report from the Commerce Commission last year.

These commissions can be extraordinarily high, the Salvation Army said in a report released on Wednesday, and New Zealand was yet to follow Australia and the UK by banning “flex” commissions, which allow dealers to choose the commission they get.

“Banning these commissions will ensure that consumers are not paying exorbitant interest rates on their car loans,” said Ronji Tanielu, author of the report, said.

The reason for the interest charges was that the cost of add-on insurance, which has been dubbed “junk” insurance in Australia, was added to car-buyers’ loans, resulting in higher debts, and more paid in interest to lenders.

Poor-value add-on insurance policies were sucking a huge amount of money out of households, the Commerce Commission reported last year.

Zuzana Chovanova first time car buyer through a dealer ended up in a very expensive loan/insurance arrangement not realising what she was being sold, or the final cost.

Between 2018 and 2020, over 580,000 add-on policies were sold by the 15 insurers and lenders surveyed by the commission costing consumers $548 million.

Those 15 insurers admitted collectively selling an average of 153,918 add-on insurance policies each year, collecting premiums of $148m per year, on which just $43m in claims was paid.

That did not include 39,448 poor-value “repayment waivers” sold each year, the commission found.

This graph was created by the Commerce Commission, and published in its November report on car financing 'add-ons'. It shows the difference between the amount 'waived' by lenders in payments and the amount paid by consumers in retail premiums for repayment waivers in each year.

But on annual premiums of around $35m for repayment waivers, just $4m of loan payments were waived.

Salvation Army financial mentors, who help people struggling with unaffordable debts, found car loans to be among the biggest cause of financial harm among people seeking their help.

“The sheer impact and unaffordability of these products for the poorer New Zealanders the Salvation Army works with is immense,” Tanielu said.

The add-on insurance costs could actually result in car buyers on tight budgets having to go without other, more important insurances.

In one case seen by the Salvation Army a man was so loaded down with debt, including for agreeing to add-on insurance at the dealership where he bought his car, that he had to cancel his ordinary car insurance.

When he crashed, he was left with the debt, including for the add-on insurances.

The add-on insurances he had from an insurer called Autosure were mechanical breakdown cover, payment protection insurance, and “gap” insurance.

Salvation Army Social Policy and Parliamentary Unit policy analyst Ronji Tanielu says car dealers and insurers are working together for their mutual benefit, which is resulting in poor value for consumers.

Gap insurance is designed to cover the gap between what a person’s car insurance pays them when their car is written off, and the amount they owe to the lender who financed their deal.

Together, the three add-on insurance policies cost the man $2701 at the point of sale.

“After receiving the loan for the car, the client cancelled the primary car insurance as he could no longer afford the repayments,” Tanielu said.

The lender, Avanti, was continuing to charge interest and fees on the loan, and was pursuing the man for arrears.

The Salvation Army called on the Government to ban flex commissions, ban dealers from selling car buyers add-on insurance until four days after they bought their car, and capping commission on add-on insurance to 20% of the premium the policyholder paid.

It isn’t only add-on insurance where flex commission still exist. Car dealers are also able to organise loans for car buyers, and they can earn extra by adding an interest margin on to loans, without having to tell the buyer.