Category: Insurance Industry

CBA ignored ASIC to deny claims payout

CBA’s life insurance business CommInsure has admitted to not following recommendations from the corporate regulator to update its medical definition of a heart attack so it could deny the payout of a trauma claim to one of its customers, via InvestorDaily.

On Wednesday, the royal commission heard that ASIC had sent a letter to CommInsure flagging its concerns that its reliance on outdated medical definitions in assessing claims – while not in breach of the duty of utmost good faith in Section 13 of the Insurance Contracts Act – fell significantly short of consumer expectations.

The counsel assisting Rowena Orr cited a letter from 22 March 2017 from the ASIC deputy chair at the time, Peter Kell, who noted that in, 2012, the European Society of Cardiology, the American College of Cardiology, the American Heart Association and the World Health Federation published an expert consensus document about the definition of heart attacks.

Sitting in the witness box, CommInsure managing director Helen Troup was questioned by Ms Orr on whether she was aware that this had been reached at the time.“Yes,” Ms Troup said.

“And that report endorsed the use of troponin as a means of detecting heart attacks?” Ms Orr continued.

“Yes,” Ms Troup responded.

“And the report said that laboratories should use a cut-off value of the 99th percentile of a normal reference population to determine whether there had been a heart attack?” Ms Orr said.

Ms Troup replied in the affirmative.

Ms Orr then noted Mr Kell’s comments in the letter that CommInsure’s decision to select the 11 May 2014 as the effective date of the change had no robust rationale, given the joint report was published in 2012.

She then noted the letter said CommInsure’s conduct was unreasonably slow in responding to the changes in medical practice, that it was on notice that the standard was to be updated and had not done that even three years after the joint report was published, and that seven other insurers had updated their definition by 11 May 2014.

“While this is not contrary to the law, it is ASIC’s view that this has unfairly impacted on some consumers and better practice would be to select an earlier date,” Ms Orr said.

Royal Commission Moves On To Insurance

The Royal Commission in Financial Services Misconduct has announced that the sixth round of public hearings will focus on the Insurance Industry and will be held in Melbourne from Monday 10 September to Friday 21 September.   AMP, CommInsure, IAG and Youi are among the case studies to be considered. More grief for the industry we suspect as more bad behaviour is uncovered!

The sixth round of public hearings will consider issues associated with the sale and design of life insurance and general insurance products, the handling of claims under life insurance and general insurance policies, and the administration of life insurance by superannuation trustees. The hearings will also consider the appropriateness of the current regulatory regime for the insurance industry.

The Commission presently intends to deal with these issues for the purposes of the public hearings by reference to the case studies set out below. These include the natural disaster case studies that were originally to have been examined in the fourth round of public hearings. Entities are named in alphabetical order and not in the order in which the evidence of those entities will be heard.

  Topic Case Studies
1. Life insurance
  • AMP
  • ClearView
  • CommInsure
  • Freedom Insurance
  • REST
  • TAL
2. General insurance
  • AAI (Suncorp)
  • Allianz
  • IAG
  • Youi
3. Regulatory regime
  • Code Governance Committee
  • Financial Services Council
  • Insurance Council of Australia

During the hearings, evidence will also be given by consumers of their particular experiences. The entities that are the subject of consumer evidence will be informed by the Commission.

Royal Commission Cracks Down on Life Insurance Phone Sales

The banking and financial services Royal Commission has unearthed the unethical practices and incentives of life insurers selling policies over the phone at the expense of the most vulnerable customers living in remote communities; via Financial Standard.

ASIC Indigenous Outreach Program senior policy analyst Nathan Boyle highlighted the rampant practice of signing up customers by being forced into policies they allegedly didn’t need or unwittingly signed up for.

Based on listening to several phone calls from ClearView Life Insurance, Boyle alleged staff coaxed customers into providing bank details and enough personal information which then entered them into a contract without knowing, he said.

This is the way “gratuitous concurrence can play out in practice,” he added.

Boyle was referring to ASIC’s review of ClearView in February, which used unfair and high pressure sales tactics when selling life insurance direct to consumers over the phone between 1 January 2014 and 30 June 2017.

Of 32,000 life insurance policies sold, 1166 were to consumers residing in areas with high indigenous populations that unlikely spoke English as their first language.

ClearView has since ceased selling life insurance directly to consumers and refunded $1.5 million to thousands of customers as a result of poor sales practices.

The Commission heard the story of Kathy Marika, an indigenous woman who was convinced into buying a funeral insurance policy with Let’s Insure (which is owned by Select AFSL) even though she was already covered.

Marika said she couldn’t fully understand the representative, who spoke over her and at great length and initially believed was calling about a survey. Ultimately, she said the representative was “forcing” her to sign up to a policy that deducted $60 per month from her account.

“I told them that I didn’t want it. I told them I’ve already had one, but he seemed to be really pushing or asking me to say ‘yes,'” she said.

When Marika eventually decided to cancel the policy, she said Let’s Insure was relentless with the phone calls.

Senior Counsel Assisting Rowena Orr asked: “And in your statement you say that sometimes they called you day after day and sometimes once a week?”

“Well, they never left me alone,” Marika said.

She eventually ran into financial difficulty and sought the assistance of Legal Aid. She told them she could no longer afford the funeral insurance.

In a written response, Let’s Insure said it disputes the allegations it didn’t act properly and in accordance with the law when it sold the policy.

“However, as an act of goodwill, we will refund all premiums paid on the above policies, currently 40 totalling $1,890.34, subject to your client’s authorisation for us to cancel their policies,” Let’s Insure said.

Select AFSL managing director Russell Howden admitted that in hindsight “we pushed our agents” and this practice was “regrettable.”

Some staff members were incentivised with a Vespa scooter and a cruise – which he conceded drove the wrong behaviour.

“We have evolved our commission structure. It was designed to make agents productive but, at all times, the intended outcome was compliant sales,” he said.

A Roy Morgan survey released in January found the phone was the most popular means of purchasing life insurance policies.

Latitude Insurance Refunds $1.1 Million From CCI Mis-selling

Hundreds of Latitude Insurance customers were mis-sold consumer credit insurance (CCI) with personal loans says ASIC and will be refunded to a total of $1.1 million.

Hallmark General Insurance Company Ltd (trading as Latitude Insurance) will provide refunds  of approximately $1.1 million to 905 customers after it mis-sold consumer credit insurance (CCI) with Latitude personal loans and incorrectly denied claims on CCI policies sold with Latitude and other credit cards.

CCI is a type of add-on insurance that provides some cover to meet the repayments under a consumer’s loan contract if they die, suffer a traumatic illness (such as cancer), or become disabled or unemployed.

Latitude Insurance identified and reported to ASIC that between October 2011 and June 2014, it sold involuntary unemployment insurance to personal loan customers who were ineligible to claim because they did not work the required minimum 20 hours per week.

It also identified that between May 2014 and February 2017, its new partly automated claims assessment process had incorrectly denied claims to credit card CCI customers, because it failed to properly apply the exclusion definition of ‘casual employment.’

In response, Latitude Insurance will:

  • refund premiums and interest to personal loan involuntary unemployment insurance customers who were ineligible to claim. Customers also have the option to retain their policy and will not be subject to the minimum working hours condition for past or future claims.
  • pay claim amounts and interest to credit card CCI customers that had incorrectly denied claims.

Acting ASIC Chair Peter Kell said customers should never be sold insurance they won’t be able  to claim on and that claims processes must be robust.

‘Customers should always be confident that when they come to claim on their insurance, their claim will be properly assessed.’

Latitude Insurance will be contacting eligible customers.

People on low incomes are sacrificing basic goods to take out insurance

From The Conversation.

[Insurance] is the one thing I will not skimp on, because we don’t know what’s around the corner with my husband being unwell and a disabled son. And now I’ve hurt my foot. I mean, accidents happen. I don’t know what’s around the corner. That’s the first thing that gets paid.

Maggie (all names in this article are psuedonyms), is a single woman in her 50s who lives with her husband and son with disability. She feels health insurance is essential to prepare for seemingly inevitable risks.

To afford insurance, Maggie cuts down on expenses by not buying clothes; she gets free clothes from charity organisations. She also saves money by only purchasing the cheapest marked-down foods that will expire soon and avoiding public transport to save money. And when things are tight she skips meals to make do.

Some people on low incomes put insurance cover first – even if it means doing without basic goods, our research finds. Yet low-income households are the most likely to lack private insurance cover.

Insecure work, low and unstable incomes, and increasingly haphazard and unreliable social protections in education, health, transport and housing continue to make the lives of low-income households risky. Insurance can mitigate some of the harms low-income people face.

To understand how households with low or precarious incomes manage short and longer-term risks, we surveyed 70 people in three areas of suburban Melbourne that experience high levels of financial insecurity. We asked questions about household income and expenditure and how they coped with unexpected expenses.

We found that in order to pay for insurance people were cutting down on heating, food and outings.

Weighing up the odds

The financial problems faced by people on a low income are often explained by poor financial skills, knowledge and behaviours. Yet our research shows that low-income households are also constrained by uncertain and inadequate incomes, unaffordable housing and unexpected high energy costs.

Some of the people we surveyed weighed up their risk of serious incidents and went without insurance because the everyday risks they experienced were more pressing than potential future risks.

Ted, a single man in his fifties receiving the Newstart Allowance, would have liked to have insurance but explained that it was:

just cost prohibitive. I’d rather try and get a roof over my head…than being insured should something happen down the track.

Malcolm, a casually employed factory worker also receiving the Newstart Allowance, said his car was “not worth insuring” for property damage, even though not having insurance exposed him to risk if he damaged another person’s car.

It’s a financial balancing act. Most things that could get damaged on my car I could fix myself…It’s just unnecessary for me. And if it gets written off, it gets written off, and I move on.

Mending the safety net to reduce avoidable risks

Increasingly, private insurance is filling the gaps left by government policies. Instead of enduring the indignities of income support, people are encouraged to take out income protection insurance.

Private health insurance is promoted as a way of avoiding the queue for health care. Inadequate public transport means an increased reliance on private transport – with all the risks and costs that entails.

Insurance providers are aware of the increased risks of inequality. The data insurance companies gather provides fine grained information about the nature of risks to which individuals and insurance companies are exposed.

Research commissioned by the Actuaries Institute notes that because of this data gathering, a growing proportion of the population will be deemed so risky that the price of insurance will become too great for them.

Poor people who already lead risky lives will then be faced with even more risk. The Actuaries Institute report argues that there will be a greater need for government subsidised compulsory insurance to protect those who are exposed to risk beyond their control. But greater access to insurance isn’t the only answer.

Our research suggests that investment in the social safety net could reduce some of the avoidable risks that come with poverty. The government should be ensuring low-income households have access to adequate, predictable income; affordable, quality housing, accessible, affordable public transport and health care. All of these things reduce risks for individuals and contribute to a less divided and risky society.

Authors: Dina Bowman, Principal Research Fellow, Research & Policy Centre, Brotherhood of St Laurence and Honorary Senior Fellow, University of Melbourne; Marcus Banks, Senior Research Fellow, Work & Economic Security, Research & Policy Centre, Brotherhood of St Laurence. Social policy and consumer finance researcher, School of Economics, Finance and Marketing, RMIT University

Genworth Changes Recognition of Premium Revenue

Genworth Mortgage Insurance Australia Limited (Genworth  today advised an expected greater fall in Net Earned Premium.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

Genworth said that it has finalised its annual review of the premium earning pattern (also known as the “earnings curve”). The review process included a detailed evaluation and recommendation by the appointed actuary and supporting work and recommendation by independent reviewers.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction

The modified premium earning pattern reflects an expectation of the future emergence of risk based on a consideration of all identified relevant factors, but principally:

  • losses from mining related regions, which form the majority of the incurred cost of the last 2 years, continuing to occur at late durations; and
  • improvements in underwriting quality in response to regulatory actions, along with continued lower interest rates, extending the average time to first delinquency, while continuing to be beneficial to overall loss levels.

The change will have the effect, in aggregate, of lengthening the average duration of the period over which Genworth recognises its revenue by approximately 12 months. It also has the effect of introducing a third separate earnings curve for business written in 2015 and later. The change however does not affect the total amount of revenue expected to be earned over time from premiums already written.

The two earnings curves that comprise the previous premium earning pattern were first introduced in 2012. The last time the Board approved a change to the premium earning pattern was in September 2015, with this change applied to the financial statements in the third quarter of 2015. The Company conducted an annual review of the earnings curve in 2016 but no change was made to the curve based on the information at that time.

The modified premium earning pattern will be applied to the recognition of revenue in the income statement for the fourth quarter of 2017 and in subsequent reporting periods. The Company’s Unearned Premium Reserve (UPR) balance of $1,087 million as at 30 September 2017 remains unchanged. As was highlighted in the half year (2 August 2017) and third quarter (3 November 2017) results announcements, any change to the premium earning pattern has the potential to change the Company’s 2017 full year guidance.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction.

Based on preliminary estimates, the Company expects the full year loss ratio to remain between 35 and 40 per cent as the NEP reduction is expected to be partially offset by the fourth quarter incurred loss expectations, and preliminary estimates of the Outstanding Claims Reserves as at 31 December 2017 which currently reflect more favourable recent incurred loss experience.

The change to the premium earning pattern is expected to have minimal impact on Genworth’s regulatory solvency ratio which is expected to remain above the Board’s target capital range of 1.32 to 1.44 times the Prescribed Capital Amount as at 31 December 2017. The Company has completed an on-market share buy-back to a value of approximately $50 million and following this announcement intends to continue the
buy-back for shares up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

The Board continues to target an ordinary dividend payout ratio range of 50 to 80 percent of underlying NPAT and will continue to evaluate other capital management opportunities.

The Company notes that this full year outlook is based on preliminary expectations and recommendations that remain subject to completion of the year end process, including the external audit, market conditions and unforeseen circumstances or economic events. The Company expects it will be in a position to provide guidance for the 2018 financial year at the time of announcement of its 2017 full year financial year results.

Genworth notes that it has had discussions with ASIC about the premium earning pattern. The modification to the premium earning pattern announced today was determined following the outcome of Genworth’s annual review. In particular, Genworth believes that the premium recognition pattern as applied to prior released financial statements was the correct pattern to apply in respect of those financial statements. Genworth does not intend to restate financial statements already released to the market.

ASIC notes the decision by Genworth Mortgage Insurance Australia Limited (Genworth) to change the recognition of premium revenue in its upcoming financial report for the year ending 31 December 2017.

Genworth has announced that the change will negatively impact net earned premium by approximately $40 million and as a result net earned premium for the 2017 year is expected to be approximately 17-19% per cent lower than the 2016 year, instead of previous guidance of a 10 to 15 percent reduction.  The change affects the recognition of revenue for the fourth quarter of 2017 and subsequent reporting periods.  The unearned premium liability at 30 September 2017 remains unchanged.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

Youi pays $164,000 for poor insurance sales practices

ASIC says Youi has refunded 102 consumers approximately $14,000 in total, and will pay $150,000 as a community benefit payment to the Financial Rights Legal Centre’s Insurance Law Service, after ASIC raised concerns about its home and car insurance sales practices.

Youi has also engaged an independent firm (EY) to conduct a review of sales practices in response to concerns that some sales staff were charging consumers for insurance policies without their consent to purchase. This included where consumers only made an inquiry to get an insurance quote.

ASIC was concerned that Youi’s remuneration and bonus structures incentivised sales staff to prioritise sales ahead of consumers’ interests.

Since the review, Youi has:

  • Changed its remuneration structure and reduced the incentives provided to sales staff based on sales volumes
  • Reviewed sales scripts and staff training
  • Introduced new controls and monitoring of sales staff
  • Made significant changes to its legal, risk and compliance capability.

EY will conduct a follow-up review to assess the implementation and test the effectiveness of the recommendations made in their initial assessment of Youi’s risk culture and review of sales practices. A final report will be provided to ASIC by 30 June 2018.

Acting ASIC Chair Peter Kell said positive consumer outcomes should be at the heart of sales structures: ‘It is completely unacceptable that customers were signed up for Youi insurance policies without their knowledge or permission.’

Consumers who believe they have a dispute with Youi should contact Youi directly on 07 3852 7895. The Financial Ombudsman Service can provide further assistance on 1800 367 287.

Background

The Financial Rights Legal Centre’s Insurance Law Service is a national service providing consumers free advice about insurance problems.

ASIC’s MoneySmart website has information for consumers about getting the best deal on insurance, including what to look for in insurance products so they can find the right policy for their needs.

CBA Sells Life Insurance Businesses

Commonwealth Bank today announced the sale of 100% of its life insurance businesses in Australia (“CommInsure Life”) and New Zealand (“Sovereign”) to AIA Group Limited (“AIA”) for $3.8 billion (the “Transaction”). The sale agreement also includes a 20-year partnership with AIA for the provision of life insurance products to customers in Australia and New Zealand.

CommInsure Life and Sovereign customers will retain all the current benefits of their existing policies. The Transaction and partnership announced today will allow customers to have continued access to high quality life insurance products through Commonwealth Bank and life and health insurance products through ASB, with the addition of AIA solutions to our offerings. Customers will benefit from AIA’s innovation in life insurance including a focus on digital engagement, the benefits and synergies of global scale and specialisation, and their strong bancassurance experience.

AIA is the largest independent publicly listed pan-Asian life insurance group and has well established life insurance businesses in Australia and New Zealand. The combined operations from this transaction will make AIA the market leader in both Australia and New Zealand.

Commonwealth Bank Chief Executive Officer Ian Narev said: “Providing our customers with access to high quality products and services for all their financial needs is core to our vision of securing and enhancing financial wellbeing. We have said for some time that while distributing life insurance is a fundamental part of that strategy, we were open to different models for doing so. The combination of AIA’s leading insurance capability and scale and Commonwealth Bank’s broad distribution, and our complementary values and commitment to customer focus and innovation, mean that a partnership between us will create an even better experience for our customers, in a more efficient way for our shareholders.”

AIA Group Chief Executive and President, Ng Keng Hooi, said: “The acquisition of CBA’s life insurance businesses and the new 20-year bancassurance partnership with CBA will strengthen AIA’s protection market leadership and expand our distribution capabilities in these markets. We look forward to welcoming our new customers and colleagues, and working with CBA to deliver innovative insurance products and services that meet the growing financial protection needs of customers across Australia and New Zealand.”

The Transaction will deliver important strategic benefits to Commonwealth Bank, contributing to the Group’s vision to secure and enhance the financial wellbeing of customers whilst creating value for shareholders.

The sale price is $3.8 billion, a multiple of 16.9x FY17 pro forma earnings and 1.1x the embedded value of CommInsure Life and Sovereign. A pre-completion dividend is also expected to be received by Commonwealth Bank (amount subject to the timing of completion, business performance and regulatory approvals).

Under the terms of the partnership, Commonwealth Bank will continue to earn income on the distribution of life and health insurance products.

The Transaction is expected to release approximately $3 billion of Common Equity Tier 1 (“CET1”) capital and result in a pro forma uplift to the Group’s FY17 CET1 ratio of approximately 70 basis points on an APRA basis. Due predominantly to the carrying value of goodwill, the Transaction is expected to result in an indicative after tax accounting loss on sale of approximately $300 million, net of separation and transaction costs.

The Transaction and partnership do not include general insurance and the CommInsure brand will be retained. The Transaction is subject to certain conditions and regulatory approvals in Australia and New Zealand and is also conditional upon the transfer of Commonwealth Bank’s equity interest in BoComm Life Insurance Company Limited (“BoComm Life”) out of CommInsure. Commonwealth Bank is considering a range of strategic alternatives for the BoComm Life equity interest, which would be conditional on approval from the China Insurance Regulatory Commission. The Transaction is expected to be completed in calendar year 2018.

 

Blockchain Prototype Is Credit Positive for P&C Insurers and Reinsurers

The Blockchain Insurance Industry Initiative (B3i) has unveiled a prototype application that streamlines contracts between insurers and reinsurers using blockchain technology according to Moody’s. Once the technology becomes mainstream, they expect that it will significantly reduce policy management expenses and speed up claims settlement for insurers and reinsurers, a credit positive.

B3i’s application gives insurers, reinsurers and brokers a shared view of policy data and documentation in real time.

Blockchain’s shared digital ledger has the potential to increase the speed and reduce the friction costs of reinsurance contract placements. Reinsurers would use the common platform to streamline claims analysis, potentially reducing significantly their administration and management costs.

Blockchain technology is a chain of blocks of encrypted data that form an append-only database of transactions. Each block contains a record of transactions among multiple parties, each of which has real-time access to a shared database. As a block is encrypted with a link to the previous block, it cannot be altered, except by unencrypting and amending all subsequent blocks.

PricewaterhouseCoopers estimates that blockchain technology will reduce reinsurer non-commission expenses by 15%-25%, including data processing efficiencies and reduced chance of overpayment because of data errors. For illustrative purposes, the exhibit below shows the potential effect on annual pre-tax earnings for some of the world’s top reinsurance companies, all of which are included in the B3i consortium. We also expect the technology to decrease the time between primary insurance claim and reinsurance reimbursement, a credit positive for primary insurers.

B3i launched in October 2016 with five original members, including Aegon N.V., Allianz SE, Munich Reinsurance Company, Swiss Reinsurance Company Ltd. and Zurich Insurance Company Ltd. It now has 15 members. Beta testing for B3i’s program is scheduled for October and is open to any insurers, reinsurers or brokers that wish to pilot the technology, regardless of their membership status in the consortium. Although the initial pilot was for property-catastrophe excess-of-loss policies, B3i plans to broaden its application to other types of reinsurance, catastrophe bonds and other insurance- linked securities.

CBA credit card scandal ‘just the tip of the iceberg’

From The New Daily.

The Commonwealth Bank credit card insurance scandal is the “tip of a very large iceberg”, legal experts have warned.

Philippa Heir, a senior solicitor at the Consumer Action Law Centre, welcomed the bank’s promise to repay $10 million to 65,000 students and unemployed people sold dodgy credit card insurance.

“Unfortunately it’s very widespread,” she told The New Daily.

“We’ve seen misselling of this sort of insurance on a large scale.”

On Monday, corporate regulator ASIC revealed that CBA – already mired in a money-laundering scandal – had agreed to refund about $154 to each of the 65,000 affected customers, who were sold ‘CreditCard Plus’ insurance between 2011 and 2015 despite being unable to claim for payouts.

CBA told the market it “self-reported the issue” to ASIC in 2015, and that the insurance was “not intentionally sold to customers who were not eligible”.

 

It was an example of what Consumer Action calls ‘junk insurance’, which is where inappropriate insurance policies are slipped covertly into the paperwork for car loans, credit cards and other financial products, or where the salesperson pressures the customer to buy unsuitable coverage.

Ms Heir said the CBA example was by no means an isolated case, and that many victims were poor.

“People who’ve spoken to us say they were told they had to [pay for insurance] or they would not qualify for finance for the car they needed to support their family. So this is affecting people on lower incomes significantly.”

Last year, ASIC published the results of a three-year investigation of add-on insurance sold by used car dealers. Its sample group paid $1.6 billion in premiums for only $144 million in payouts.

This amounted to an average payout of nine cents per dollar of premiums, compared to 85 cents for comprehensive car insurance, ASIC reported.

Consumer Action has set up a website to help Australians claim refunds from insurers. More than $700,000 has been claimed so far.

Here are the potential warning signs that a policy may be unsuitable.

Be wary of pressure selling

Consumer Action’s Ms Heir said high-pressure sales tactics were a danger sign.

“The key is, if you’re being put under pressure to buy insurance, that might ring alarm bells that you should shop around.”

An independent review of the banking sector, released in January, contained shocking revelations from bank staff who reported being forced to oversell financial products, including unnecessary insurance.

One anonymous bank teller said: “If I do not meet my daily sales target I have to explain how I will catch up at morning meetings of the team. I am behind in sales of wealth and insurance products and need to catch up to keep my job.”

Be wary of add-on insurance

ASIC’s recent investigation related specifically to add-on general insurance policies sold by used car dealers. It found “serious problems in the market”.

These add-on policies cover risks relating either to the car itself, or to the car loan. Examples include ‘consumer credit insurance’ and ‘tyre and rim insurance’.

Consumer Action agreed it was a high-risk area.

“One person we spoke to spent $20,000 for add-on insurance on a $60,000 car loan, so it took that loan from $60,000 to $80,000, which is hard to even comprehend,” Ms Heir said.

Be wary of insurance for small losses

An expert on investor behaviour, Dr Michael Finke of Texas Tech University, warned in a recent financial literacy series that fear of losing money temps consumers to buy unnecessary insurance.

Buying a policy is “rational” only when the probability of losing money is low and the size of the potential loss is high, Dr Finke said.

“It’s a good strategy to make sure that you let the small ones go so you can focus on insuring bigger losses.”

He recommended setting a “risk retention limit” – a dollar figure below which you don’t insurance yourself.

“This limit should be based on your wealth and your ability to cover a loss if it happens,” he said. “This may mean keeping a little bit more money in a liquid savings accounts just in case.”