Scandal of the least competitive insurance and credit market

It's time to overhaul the loans and insurance offered by car dealerships, writes Rob Stock.

Michael Bradley

It’s time to overhaul the loans and insurance offered by car dealerships, writes Rob Stock.

OPINION: Don’t buy insurance from a used car dealer unless you want to fall victim to what may well be the least competitive market in the country.

Spurred on by protests from financial mentors, the Commerce Commission has been researching the car finance “top-up” insurance market.

This is the market for credit reimbursement and mechanical breakdown insurance, which is often sold by car dealerships to people who buy used cars from them.

The commission discovered that incredibly unsuspecting used car buyers were being sold very low value insurance.

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Over the three years studied, 15 insurers admitted to collectively selling an average of 153,918 supplemental insurance policies each year, collecting premiums of $148 million a year, of which only $43 million in claims were paid.

Some 39,448 “refund waivers” were also sold each year.

These waivers, which have similarities to loan repayment insurance, are meant to come into effect when people are unable to work and cannot meet their repayments.

RICKY WILSON/STUFF

Pensioner Bobby O’Connor went hungry after the courts misappropriated $35 a week from his NZ Super to pay off a loan he thought was settled in 2012. (First published 2020.)

But out of about $35 million in annual premiums for repayment waivers, only $4 million in loan repayments are forgiven.

The facts of this market are grim.

Car dealerships care about the commission they receive for selling policies.

Insurers rely on dealers to sell their insurance, and therefore compete with each other to sell their policies.

The interests of car buyers are not a priority.

This graph was created by the Commerce Commission and published in its November report on auto finance “top-ups”.  It shows the difference between the amount “waived” by lenders in payments and the amount paid by consumers in retail premiums for repayment waivers each year.

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This graph was created by the Commerce Commission and published in its November report on auto finance “top-ups”. It shows the difference between the amount “waived” by lenders in payments and the amount paid by consumers in retail premiums for repayment waivers each year.

The result is high commissions and poor value for money.

Buyers probably think they’re doing the right thing by getting insurance, but if they knew what the wrong value is, they’d be so offended they wouldn’t take it.

“Complementary” insurance and waivers are hard to claim, but until protests from financial mentors, no one in power has shown much interest in the poorer people who have been selling this junk insurance.

It is ironical. Not only did we pass laws to protect the poorest people from unscrupulous lenders, but we harassed the banks until they stopped selling rotten value payment protection / credit card insurance .

Loan repayment insurance is not a bad idea in itself.

Getting into debt is a big risk, especially for an expensive and depreciating asset like a car.

But if the value of loan repayment insurance is a function of secret agreements between insurers and auto dealers about commission, then we need to set minimum standards.

I hate to tell you this, but that’s not the only uncompetitive horror that used car shoppers are exposed to.

Car dealerships also often sell the loans that buyers use to pay for the cars. Lenders give dealers base rates for loans, and dealers choose how much they add to the base rate.

Let’s say a dealer’s base rate is 15% for loans. A dealer might add 9 percent to that, or 2 percent, or 5 percent, or 3 percent.

It’s called “flexible commission” and it’s banned in Australia and the UK because it’s unfair and penalizes people with low financial literacy. A lender who does not allow large margins will not do much business.

The “additional” insurance commission is also falling.

So what should we do?

We need to set minimum standards for loan repayment assurance and waivers.

And we need to force dealers, insurers and lenders to tell buyers the range of interest and commissions they might charge on loans and insurance, as well as how much they intend to charge. We must require all parties to disclose this information on their websites.

It would spark some heated conversations and give the competition a little boost.

GOLDEN RULES

  • Debt carries risks
  • Don’t let cars ruin your financial life
  • Be deeply suspicious of dealer loans and insurance

Priscilla C. Carnegie