IAG shrugged off insurance cover concerns

IAG refused to cut bonuses tied to the sale of junk insurance through car yards because of fears it’d lose market share.

Insurance Australia Group executive Benjamin Bessell leaves the royal commission. Pic: AAP

Insurance Australia Group refused to cut lucrative bonuses tied to the sale of junk insurance it pushed through car yards on unsuspecting customers because of a fear it would lose market share.

On the stand at the royal commission for a second day, IAG head of business distribution Ben Bessell also faced questions about how the company shrugged off concerns from its head of corporate affairs that the so-called “add-on” insurance could damage IAG with a “reputation impact” by continuing to sell products that “might not always help our customers”.

Mr Bessell conceded that IAG’s insurance business, Swann Insurance, had no real oversight of how its authorised representatives in car dealerships were selling the add-on insurance, which was sold in conjunction with vehicle and motorcycle sales using high-pressure sales tactics.

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The add-on insurance products included policies such as tyre and rim insurance, which the Australian Securities and Investments Commission had been raising concerns about with the industry since 2013.

The royal commission heard how IAG rewarded car dealerships with commissions and gifts in a bid to get them to sell as many junk insurance policies as possible.

One program offered representatives the opportunity to take home $150,000 for selling $1.2 million in premiums.

Despite the huge slice of revenue the company was earning through the channel, IAG did not audit the business to see if its authorised representatives were complying with financial services laws.

ASIC has found the policies had incredibly low claims ratios, leading to hefty profit margins for companies. Over the last decade, Swann sold 850,000 policies, on which less than 10 per cent were claimed, and IAG drew in more than $1 billion in premiums.

Swann Insurance is already on the hook for remediation of $40 million to almost 70,000 customers over the sale of the dodgy insurance.

Despite knowing of the problems with the consumer credit insurance, IAG did not stop selling the product or reduce the lucrative commissions it was paying to authorised representatives, out of fear other companies would take its market share.

The royal commission heard IAG head of corporate affairs Jane Anderson had warned the company’s consumer division boss Andy Cornish in mid-2015 that there was a risk that ASIC would force regulation on the consumer credit insurance market, and that IAG needed to think through the “reputation impact” of being associated with a product that “might not always help our customers”.

Counsel assisting the commission, Mark Costello, asked Mr Bessell whether it was selling policies in cases it knew there was little need for the product. “In many cases that’s true,” Mr Bessell said.

“Maintaining market share was not possible with the universal action to lower commissions?” Mr Costello asked. “That’s correct,” Mr Bessell said.

“Was it wrong for Swann to incentivise its authorised representatives in the way it did?” Mr Costello asked.

“They were in line with market. They were not out of step with market conditions. Having said that, they were high,” Mr Bessell said.

“Do you think IAG formed the view that it was just too hard to fix these issues on its own?” Mr Costello asked, to which Mr Bessell said the company was trying to be more “customer-centric”.

He said IAG was supportive of a “deferred sales model” which would force companies to wait at least four days between suggesting add-on insurance products and the close of a sale.

But Mr Costello asked why IAG didn’t stop selling the policies, as they suffered “inherent problems”.

“Do you think, at the end of the day on a proper analysis, are these products of sufficient value to a sufficient number of consumers?” Mr Costello asked.

“I’m sure there are consumers who see value in these products,” Mr Bessell said.

ASIC has previously been heavily critical of sector’s ­proposed 20 per cent cap on commissions paid to car dealers, arguing it would do nothing to prevent companies selling consumers “expensive, poor-value products”.

Compensation from add-on car insurance includes Allianz’s $45.6m, Suncorp’s $17.2m, Swann Insurance’s $39m and QBE’s $15.9m.

ASIC’s 2016 industry-wide review of add-on insurance revealed extreme rates of high-pressure sales tactics, inadequate customer information, sky-high commissions and conflicts of interest. Over three years, consumers paid $1.6 billion in premiums but received only $144m in claims — representing a claims payout ratio of just 9 per cent.