Don't buy “rip-off” insurance products offered at car yards

You’ve scrolled through ads to compare mileage and safety features. You’ve kicked tyres and gone for a test drive. Finally, you’ve decided on the car for you.

You’ve lined up the finance and are set to sign the paperwork when the car dealer brings up a raft of insurances. It could be mechanical breakdown insurance, guaranteed asset protection, credit contract, payment protection – or all of them.

These insurances are sold as protection should you be unable to pay off the loan, or if the car breaks down.

You don’t want to miss out on the car, or the finance deal, so you say yes.

But these products aren’t providing good value for money.

“These products are a rip-off,” according to Andrew Mitchell, a financial mentor at the Salvation Army.

Consumers paid about $442 million in retail premiums for add-on insurance at car yards, between 2018 and 2020. Only $128m was paid out in claims.

So, what do these add-on policies cover and who really benefits?

Mechanical breakdown insurance (MBI)

MBI is for an unforeseen mechanical or electrical fault.

But the fine print has a long list of exclusions in the policies offered by the five main providers: Autosure, Janssen, Protecta, Quest and Provident Insurance.

All exclude pre-existing faults, while all but Janssen’s have broad exclusions for design faults.

There’s also a long list of repairs not covered. Protecta’s Pinnacle policy won’t cover any costs relating to brake pads and shoes, shock absorbers, airbags, the battery, door locks, seatbelts or any wear and tear of the clutch.

Autosure has a long list of excluded components such as the chassis, catalytic converters and cambelts.

All offer ‘customer care’ extras. Protecta Insurance Maxi MBI policy includes benefits for travel ($300), accommodation ($300) and towing ($100).

Yet, these only apply if you break down 100km or more from home, and the travel benefit (car hire) only applies if your wheels are out of action for more than 72 hours.

Provident’s extras only apply if you’re 120km or more from home, though it provides car hire if the repairs take longer than 24 hours.

Roadside assistance is also added to most MBI policies we looked at. Yet Protecta’s Optimum and Pinnacle policies only cover three call-outs per year – the same as Quest. At Provident it’s six call-outs, while Autosure and Janssen’s policies have unlimited call-outs.

To be eligible to claim on the policy, your car must be serviced annually.

While this is a condition of all the MBI policies we looked at, with Protecta, the first service must be at 5000km, then again at 15,000km or 12 months – whichever comes first. Other policies say the first service is at 15,000km or every 12 months.

We asked the Automobile Association if a service at 5000km is reasonable.

Jonathan Sergel, AA’s general manager of motoring services, said servicing at 5000km seems like overkill for a vehicle sold with a full service history. But he agrees that most should be serviced every 12 months or at 10,000-15,000km.

“It would be our suggestion to service as per the manufacturer’s specifications.”

The MBI policies don’t provide much more cover than the Consumer Guarantees Act (CGA).

If you’ve bought a vehicle that isn’t of acceptable quality, the CGA requires the dealer to sort it out.

Rather than buy MBI, we recommend you invest in a pre-purchase inspection and then service your car regularly.

Guaranteed asset protection (GAP)

GAP insurance covers a shortfall between the amount owing on a loan and any amount paid out by a comprehensive car insurance provider, in the event of a total loss.

Four providers offer GAP insurance: Autosure, Janssen, Quest and Provident.

You must have comprehensive car insurance in place (not third party or third party, fire and theft). If you don’t, you won’t be able to claim and may still end up paying for the GAP insurance if your car is totalled.

This happened to one Salvation Army client who took out a car loan for $8000 and three Autosure add-ons. As money got tight, he cancelled his car insurance.

He was in an accident, the car was a total loss and he had to make a KiwiSaver hardship withdrawal to replace it. But he’s still paying off the loan for the wreck, along with the add-ons.

Mitchell, from the Salvation Army, said the client “stopped the only insurance that’s worth having and purchased all the junk”.

Rather than cancelling your car insurance, you can terminate your GAP policy.

Autosure and Quest will give you a pro-rata refund if you decide to cancel outside the cooling off period. However, if you’ve added the cost of the insurance to your car finance, the refund will come off the loan.

Credit contract indemnity (CCI) and payment protection insurance (PPI)

CCI and PPI policies are similar because they both kick in if you can’t make repayments due to sickness, hospitalisation, accident, redundancy, bankruptcy or death.

Four insurers provide either of these policies. While they offer packages for self-employed or part-time employees, we focused on the employee packages for those working more than 30 hours a week in permanent employment.

There is a long list of exclusions. Anxiety, stress or any mental health condition aren’t covered. Neither are pre-existing conditions or getting caught in a natural disaster.

While all four insurers cover redundancy, you have to have been redundant for 28 to 30 consecutive days before qualifying with Autosure, Quest and Provident. It’s seven days with Janssen. If it’s voluntary redundancy, you won’t be covered.

Some insurers limit cover to those aged under 65. Janssen’s life, terminal illness and serious medical trauma cover is limited up to 65. And Quest limits life, terminal illness, disablement and redundancy benefit to those under 65.

If you are eligible, claim limits are capped. Provident’s CCI policy maximum claim limit is $4000 per month, or $200,000.

A spokesperson for Provident said the average loan value is between $12,000 and $15,000, “so the monthly loan repayment value is well under the $4000 limit”.

If you have a serious accident, all policies will cover you after five or seven days in hospital. Autosure is slightly more generous, at three days. Yet the average NZ hospital stay for acute injuries is 2.62 days.

While the accident and disablement entitlements seem generous (up to $200k), think about your sick leave. And ACC will pay up to 80% of your income if you can’t work because of an accident it covers.

All policies offer some cover if there’s a strike or lockout. However, payments don’t kick in until after 28 days of strike with Autosure. It’s 30 days with Quest and Provident.

The latest figures on work stoppages (strikes and lockouts) from Employment NZ show 112 stoppages in 2020. This affected 595 employees. On average, each person was on strike for just over a day.

Car dealers set the retail price for add-ons

During 2020, car dealers earned on average between $304 and $636 in commission from each add-on insurance sale, according to the Commerce Commission’s Motor Vehicle Financing and Add-ons Review (2021).

Insurers set the wholesale price for add-on products and allow dealers a mark-up as well, in effect a commission. So, in most cases, the dealer sets the retail price.

While insurers told the Commission the mark-up shouldn’t be more than 100%, some don’t monitor this.

Because dealers decide the retail price and their commission, insurers can’t advertise, making it harder for consumers to compare products.

We asked the five main add-on insurers how much their products cost. Quest Insurance, Protecta and Provident Insurance told us this was commercially sensitive.

However, Provident Insurance told us it sets maximum commissions ranging from 30% for GAP and CCI to 50% for MBI.

“The amount of commission a dealer can earn is set by our system, so it controls the maximum amount of commission a dealer can earn, which they cannot exceed,” a spokesperson said.

However, this is not independently monitored.

We didn’t hear back from Autosure or Janssen.

Dealers earned between $304 and $636 (on average) in commission

Few policyholders get a payout

We think add-on insurance is a good little earner for dealers and insurers but a rip-off for consumers.

Between 2018 and 2020, consumers paid about $442m in retail premiums for the three add-on insurance products.

MBI was the most popular, with nearly 300,000 policies sold, worth $312m.

Yet the number of people who claim is a lot less, according to the Commission’s report.

It looked at MBI claims from 2018 to 2020 on policies issued during that period, as well as previously existing policies that were claimed on during that time frame.

In 2020, $40m worth of claims were paid out, while consumers spent nearly $110m on premiums. Despite the numbers of lockdowns in 2020, this was slightly up on the previous year.

The number of claims paid out is even less for GAP insurance. While nearly $14m was paid in premiums, only $2m was paid out in claims in 2020. Between 2018 and 2020 there was a 9% increase in sales of GAP policies, while the total claims value decreased.

This claim rate has been steady since 2018, while the cost of premiums increased 9% from 2018 to 2020.

CCI and PPI claims and premium data was combined in the report. In 2020, nearly $34m was paid in premiums, while just under $3m was paid out.

A spokesperson for Provident said the premium figures quoted in the Commission’s report only covered three years, whereas the policies are valid for up to five years, meaning “we have paid out significantly more claims than quoted”.

Some consumers aren’t aware they’ve bought add-ons

The Commission found some dealers were falling short when it came to helping customers make informed decisions.

Thirteen out of 62 customers didn’t understand the product they had bought. Eight were not aware they had purchased an add-on, or only discovered it once the contract was signed. Fourteen thought the add-on was compulsory and a condition of getting car finance.

If you’re taking out insurance, the lender must make sure you understand your rights and obligations under the Credit Contracts and Consumer Finance Act (CCCFA). The Fair Trading Act (FTA) also prohibits dealers and lenders from making false or misleading claims.

The car yard or finance company must make sure the insurance:

• covers reasonable risks;

• doesn’t double up on insurance you already have;

• is suitable and affordable and won’t cause substantial hardship.

If a car yard is selling an insurer’s product, the insurer needs to check the dealer is meeting its CCCFA obligations.

Since the Commission’s review, Provident said it sends a summary of the cover, the policy document, the cost and exclusions to customers before purchasing. It also extended its cooling-off period from five to 14 days so customers can cancel if they change their mind.

What Australia has done about add-ons

In Australia, a salesperson can tell you about add-on insurance products at the car yard but must wait four days before selling it to you.

This was the result of the Financial Services Royal Commission review, which found numerous issues in the add-ons market.

The Australian Securities and Investments Commission found that sales were driven by commission rather than demand.

More than $130m in premiums have been refunded to consumers who should not have been sold policies.

What needs to change

“These products are a rip-off,” Andrew Mitchell, from the Salvation Army, believes.

A lot of clients who come to the Salvation Army for advice don’t realise they’ve even bought an add-on insurance product.

“Consumers end up ticking a box and buying it without really intending to, and without really knowing what it is … And obviously, if you don’t know you’ve purchased it and could claim, you never will because you don’t realise you’ve bought the product!”

He doesn’t expect the market to be sorted out overnight, but he does expect action.

“It would be disappointing if in five years’ time there hadn’t been substantial refunds and you’re still able to buy this stuff.”

In its report Not Adding Up: Spotlighting Add-on Insurance in Aotearoa (2022), the Salvation Army makes several recommendations:

• Implement the four-day pause between the promotion and sale of add-ons.

• Impose a 20% cap on commissions.

• Closer monitoring and enforcement of insurers and lenders.

• More affordable car insurance.

• Ban ‘flex commission’ practices, where the yard decides loan interest rates. In Australia, this has let dealers charge high interest rates.

The Commission has been working with insurers and lenders to ensure they’re aware of CCCF obligations. It’s also been meeting with financial mentors in the community.

It is planning monitoring of lenders, which may include motor vehicle lenders. It’s also investigating five motor vehicle lenders, covering a range of CCCFA breaches.

Yet even if prosecutions eventuate, we think the fines companies are liable for are paltry compared to the amount consumers have paid for junk insurance.

The maximum fines for breaches of the CCCFA and FTA are $600k each, while between 2018 and 2020 consumers paid $442m in retail premiums for junk insurance.