The Salvation Army has taken aim at what it calls “poor value” and “exploitative” add-on insurance products sold in the motoring industry, in a paper titled ‘Not adding up: Spotlighting Add-on Insurance in Aotearoa’.

The report details the way that certain insurance products for used cars dig low-income families into deeper financial holes, offering little value and often sold to consumers alongside vehicle financing. The paper recommends several counter measures, including a ban on the sale of add-ons.

“In light of the huge cost-of-living and inflation increases, spotlighting these financial hardship issues is critical for some of the most vulnerable people in the community,” says Salvation Army principal policy analyst and author Ronji Tanielu.

“We’ve found that while car insurance is very important for consumers, these add-on insurance products are often low value-for-money options for many New Zealanders, especially the poorer people and whānau that we serve and support.”

In the paper, Tanielu cites evidence that gross written premiums in the car insurance industry in the 12 months to September 2021 came to $2.4b, making up the largest percentage (33.4%) of premiums at the time.

Referencing figures from the Insurance Council of New Zealand, the paper shows that car insurance has owned the highest percentage of premiums relative to the rest of the market for at least the last five years ending September.

“Twenty-six percent of these clients with secured loans have multiple loans. Additionally, the total owing on these secured finance company debts equates to over $12,600 debt on average per client,” states the paper.

“Clearly this type of debt, which is most likely related to a car bought on finance, is significant for primarily poorer New Zealanders using our social services.”

The paper also utilises figures from the Commerce Commission’s ‘Motor vehicle financing and add-ons review’ paper, released last year. This paper included surveys with 15 insurers/lenders and 62 consumers who purchased add-on policies.

The paper stresses that it isn’t anti-insurance or anti-finance, outlining that it’s specifically against offerings like Guaranteed Asset Protection (GAP), Credit Contract Insurance (CCI), Payment Protection insurance (PPI), repayment waivers, and MBI.

The Salvation Army contends that these products are low value because of the ratio of uptake compared to how often they’re paid out. It states 15% of MBI policies were paid out between 2018 and 2020, and just 1% of GAP, 2% of CCI/PPI, and 2% of repayment waivers.

“This combination of high commissions and low payout of claims points strongly to an industry benefitting greatly from consumers at the point of sale and also the claims processes, with very limited returns for the consumer themselves,” it says.

The paper references that MBI, GAP, CCI, PPI, and repayment waivers have steadily increased in price over the last few years. Between 2018 and 2020, 298,116 MBI policies were sold, raking in approximately $312m in premiums. The remaining policies reportedly earned approximately $230m over the same period.

It notes that the sale of these add-on products often comes with some form of fee or commission for the dealer, incentivising the sale. Of interest or flex commission, it says “the dealer is incentivised to help the customer procure finance that may stretch their repayment capacity in order to receive these additional kickbacks from lenders”.

“Our financial mentors and budgeters encourage their clients to to take out main insurance for the car they’ve purchased, either comprehensive or at least third-party insurance. Usually, the cost of any add-on taken up is added to the car loan and repaid over the life of the loan,” says the paper.

The paper outlines several potential responses, ranging from an outright ban on the sale of add-on insurance products, to the use of a mandatory deferred add-on sales process, to a commission cap, to refund campaigns similar to those used in Australia.

“We contend that these products are a rip-off for these vulnerable consumers because the point of sale process and then the policy claims process, which are strongly biased to the insurers/ lenders, massively disadvantage the consumer,” it adds.

“All of this suggests an industry that is not competitive and definitely poor value for those people buying these products. Consumers or buyers are being ripped-off and this directly impacts the people and whānau who predominantly use our services.”

The full Salvation Army report can be read by clicking here.