Why you should reconsider purchasing car insurance through a car dealer

Have you ever gone to a dealership to purchase a car and walked out with added extras like insurance? You’re not alone – the idea of having everything done and dusted for your new car can be tempting. However, purchasing insurance through a car dealer may not always be the best choice for your long-term needs.

In 2016, the Australian Securities and Investments Commission (ASIC) released a report1 addressing serious failures in the sale of add-on insurance through car dealers, with the findings showing that the car dealer insurance market is failing consumers.2

Statistics from ASIC

The report from ASIC showed that between 2013 and 2015:

  • Car dealers received four times more in commissions ($602.3 million) than consumers received in claims ($144 million).2
  • Consumers also paid a lot more in premiums ($1.6 billion) than they got back in claims, receiving just 9% back.2
  • For some products, consumers paid more in premiums than they claimed. For example, for mechanical breakdown insurance, $940 was the average claim compared to the average premium of $1482.2

Other considerations to keep in mind

There are other elements that need to be factored in when it comes to acquiring car insurance from car dealers.

Research has shown that consumers are often unaware that the policy even exists because it is packaged into the car loan as a single premium.1 This means the loan amount and the interest can increase substantially without the consumer even knowing.

Additionally, because the purchase of a car is such a large financial purchase, many consumers are focusing on the product rather than the insurance policy.1 This means that often consumers are pressured into agreeing to the insurance policy without actually knowing what they’re purchasing.

Also, while the add-on insurance generally covers tyre and rim insurance, mechanical breakdown insurance and extended warranties, the premiums paid compared to the commissions received just don’t add up. In fact, it has been claimed that insurance sold by a dealership is actually benefitting the car dealer much more than it’s benefiting you.3

The main add-on insurance products offered by car dealerships

ASIC reviewed five common add-on insurance products for its report.1 These were:

  • Consumer credit insurance – this protects a consumer’s ability to make repayments under a credit contract.1
  • Walkaway insurance – the main benefit is payable only if the car is returned to the dealer. This means the consumer won’t be able to keep the car if they become ill.1
  • GAP insurance – this provides coverage in the event that a consumer writes off their car. In this situation, the consumer is given cover for the difference between what they owe on the loan and the market value paid out under their comprehensive car insurance.1
  • Tyre and rim insurance – this cover the cost of repairs to the tyre and rims caused by damage on the road, blowouts or punctures.1
  • Mechanical breakdown insurance – also known as an extended warranty, this covers the cost of repairing or replacing parts that have suffered a mechanical failure. This is after the manufacturer and/or dealer’s warranty is expired.1

In all five cases, ASIC found the products were poorly designed, putting the dealership first and the consumer second.1

The evolution of the insurance industry

The rise of technology is being adopted by the insurance industry, creating opportunities for insurers and consumers alike.4 These include better operating efficiency, engaging creatively with consumers especially in the digital world, and easier access to consumers than ever before.4

Consumers are becoming much more satisfied with motor vehicle insurers.5 In fact, during 2016, satisfaction amongst policyholders was up from 80.1% in 2013 to 82.1% and well up from a decade ago where satisfaction was at 74.1%.5

With satisfaction this high, maybe you should consider purchasing car insurance from a motor vehicle insurance company, rather than through a car dealer. It’s always advised that you take some time to research all possible competitive options to see what suits you and your circumstances best rather than accepting the car dealership’s add-on insurance.

The outcome of the reports

The latest ASIC report1 comes off the back of two previous reports which looked at buying add-on insurance6 as sold by car dealerships.7 Specifically, the reports found that life insurance sold through car dealers as an added extra could cost 18 times more than cover obtained through traditional methods.

The reports also indicated that a huge issue with car insurance from car dealers is that by the time consumers are actually offered the extra insurance, they are so exhausted from the purchase process that often they overlook what is actually happening and sign the contract.8 Add the pressure applied by sales staff it’s no wonder many consumers often walk away not even knowing what products they have purchased and what they cover them for.

While the result of the crackdown has been the introduction of a cap on commissions to 20% for salesmen, ASIC is also suggesting that policy terms be better disclosed, sales and communications systems be improved and also that a financial literacy initiative be introduced to improve response to customer inquiries about the added extras.1

Despite this, the best option may still be to not rush into the add-on insurance policy offered by dealerships and instead take time to research the best option for your circumstances.

Get a no-obligation quote from a direct car insurer who understands that real families need a real insurance policy. Contact Real Insurance on 13 19 48 or apply for a car insurance quote online.

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