In this edition of the ‘Virtual Summit Shorts’ series, Joseph Hoang-Luu unpacks the key learnings from Tim Spicer’s insurance-focused Concurrent session, titled ‘Deep Fried Bananas: From wholesome to gruesome (and back again?)’ at the 2021 All-Actuaries Virtual Summit.

Presented on Tuesday 4 May, Tim examined and provided insights into the key historical behaviours and outcomes that gave add-on Insurance its poor reputation, the various regulatory actions and reforms, and asks whether this market can be transformed into one that offers quality products, at reasonable prices, that meet identifiable consumer needs.

### What gave add-on insurance products its poor reputation?

1. Excessive commission rates (as high as 80%) and other fees paid to the distributors resulted in poor financial outcomes for consumers. The Dealers were the primary beneficiaries of these excessive commissions and fees and any insurers who did not comply with the high rates, simply did not write business. This incentivised unethical sales behaviour, such as telling consumers that the add-on product was a condition of finance or selling unemployment cover to an unemployed consumer.
2. Most add-on insurance products were community rated. The Dealers were the primary beneficiaries of having a simple rating structure, as they could forgo training and understood their exact commission per sale and any insurers who did not comply with the community rating, simply did not write business. This resulted in heavy cross-subsidisation and the poorest results for the ‘best’ consumers.
3. Dealers make very little margin selling cars. Unbalanced franchising agreements with large global auto manufacturers lead to heavy investment by dealers in their premises – this put them under pressure to find profit in F&I sales, aftermarkets, and spare parts. Manufacturers were also under pressure from the Government who provide taxpayer funded subsidies to support the car manufacturing industry.

### What happened to add-on insurance and what is the current state?

1. The Royal Commission of Inquiry is estimated to cost over $1 billion; 2. Around$130 million of remediation payments were made to the worst affected consumers of add-on insurance products;
3. IAG, QBE, and Suncorp withdrew from the add-on insurance market in full;
4. Allianz withdrew from many classes and reduced participation in others such as extended warranty;
5. Smaller players remain in a much-reduced market, with commissions universally agreed at 20-25%;
6. Directors & Officers (D&O) insurers have queried exposures to add-on insurance products and in some cases applied loadings or exclusions to the D&O premium/ coverage;
7. A raft of legislation has been implemented including: Product Intervention Powers (PIP), Design & Distribution Obligations (DDO), Deferred Sales Model (DSM), commission capping, and Unfair Contract Terms;
8. The ombudsman has been replaced by the Australian Financial Complaints Authority (AFCA) and acceptance rates are at all-time highs;
9. The reforms have made it more likely that non-regulated products like contract warranty would be sold.

### Are there still issues with the current state of the add-on insurance market?

Tim discussed a multitude of current issues with the add-on insurance market in his session. I decided not to summarise the points he made, as it would be an injustice to his thorough and methodical thought process. However, I have included one standout point below.

The earned loss ratio has been used as a blunt measure of value for consumers and a submission was made to Treasury for the target loss ratio for add-on insurance to be benchmarked against comprehensive motor at 90%. Tim acknowledges the positive of having a target loss ratio. However, he argues that comprehensive motor should not be the benchmark. Some differences between the products include RI and non-RI recoveries and policy terms. He also states that insurers provide benefits during the claim process that are not completely captured by the claim payment.

I would like to thank Tim for his time and effort in putting forth such an interesting paper and I would encourage our readers to read his paper in full.

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