New figures from the Australian Prudential Regulation Authority show Australians spent $330 million on Consumer Credit Insurance in the twelve months to June this year, yet only 23 cents in every dollar spent was paid out in claims. This means the product is exceptionally profitable for insurers and lenders who sell it, but casts doubt on whether policy holders are getting value for their money.
Consumer Credit Insurance is taken out on credit cards, personal loans or mortgages to cover borrowers in the event of loss of income, death or disablement, but consumer groups have long held concerns about how little is returned to consumers through claims.
‘Consumer Credit Insurance pays 23 cents in the dollar back to consumers, which is in stark contrast to car insurance which pays out 86 cents in the dollar—clearly this is a product that is benefiting the finance industry more than it is benefiting Australians,’ said Gerard Brody, CEO of Consumer Action.
‘A couple of years ago we were complaining that only 34 cents in every dollar was being used to fund claims—the fact that the number has fallen further beggars belief. We think it’s likely that this product is being sold to customers who don’t fully understand the product, are unlikely to ever need it and, in some circumstances, may be being sold to consumers without their knowledge,’ said Mr Brody.
The new figures put further pressure on the Consumer Credit Insurance industry which the Australian Securities and Investment Commission (ASIC) recently described as having ‘significant room for improvement.’
ASIC’s report from July 2013 found claiming Consumer Credit Insurance could be costly, stressful, that claimants received less than they expected, and that payments were not made in a timeframe which allowed them to meet their loan commitments. Furthermore ASIC found that policy holders who had their claims rejected felt important terms and exclusions were not explained. This followed previous ASIC investigation into Consumer Credit Insurance selling practices, which exposed poor practices.
Mr Brody said his Centre is concerned that consumers are purchasing Consumer Credit Insurance without fully understanding the product. ‘If a consumer experiences financial difficulties and cannot repay a loan or credit card, they have a legal right to ask for a hardship variation. This requires lenders to consider ways in which it can make loan repayments more affordable, and that could be a moratorium on payments or through a revised payment schedule.
‘We’re concerned that people are purchasing Consumer Credit Insurance without knowing that they have these rights under law. Lenders and insurers could do more to ensure borrowers know their rights before being offered Consumer Credit Insurance’.
Mr Brody said that the profitability of Consumer Credit Insurance risks encouraging miss-selling. ‘While there are differences, over the past few years the UK finance industry has been forced to repay consumers over £10 billion because of miss-selling of consumer credit insurance (called payment protection insurance in the UK). We don’t want to see such poor practices in Australia—banning commissions paid to lenders which encourage poor selling practices would be a straightforward, common sense first step to improving these policies.’
More from CALC at www.consumeraction.org.au