NEW car buyers are in line to receive hundreds of millions of dollars in compensation after a scathing government report into extended warranties showed they were mostly lining the pockets of dealers.
A detailed report released by the Australian Securities and Investments Commission this week looking into extended warranties was scathing, finding that the cost of them far outweighed what buyers gained in return.
ASIC said new-car buyers were being pressured into paying for “expensive, poor value products; products that provide consumers very little to no benefit; and a sales environment with pressure selling, very high commissions and conflicts of interest”.
According to the watchdog, a study of the top five products from seven insurance providers showed Australian car buyers paid $1.6 billion in premiums yet only received $114 million in claims.
Commissions received by car dealers were worth $602 million, the ASIC study found, with dealers pocketing commissions of up to almost 80 cents of every dollar paid by buyers.
In contrast, buyers only received $144 million in successful claims, which represents a nine percent return on the money paid.
Wheels has contacted the Australian Automotive Dealer Association for comment.
ASIC said the extended warranties – often rolled into finance payments with little disclosure – were sold to new and used car buyers to cover “risks relating to the car itself or relating to the loan that the consumer takes out to purchase the car” such as credit insurance or insuring against any damage from a flat tyre.
“For some major add-on products, the benefit to consumers was even lower, with consumer credit insurance claims payouts representing just five cents for each dollar of premium,” ASIC said.
Mechanical breakdown insurance showed the best return to buyers, accounting for 22 percent of the successful claims made against extended warranties. However, the average premium cost buyers $1482, with the average claim returning just $940.
ASIC said in the wake of its investigation, the insurance industry had agreed to cap new-car dealers’ commissions to 20 per cent, potentially lowering the cost of these premiums by almost 70 percent.
“There are serious problems in this market that need to be immediately and comprehensively addressed by insurers,” ASIC deputy chairman Peter Kell said.
“ASIC will be undertaking further work, including potential enforcement action, to ensure that this market delivers acceptable outcomes for consumers.
“We will also be looking at how insurers can refund consumers who have been sold inappropriate products,” he said.