Business

Are banks selling us ‘junk insurance’?

Insurance products blasted by Australian regulators as “harmful”, “worthless” and “extremely poor value for money” are being sold in New Zealand

The Australian Securities and Investments Commission has just issued a damning report into consumer credit insurance policies.

These are marketed to people with debt - on a credit card, for example, or when they buy a car or a home appliance - as a way to protect them if they get sick or lose their job and can’t pay their minimum monthly premiums. They also pay off the debt if someone dies.

But the ASIC report says these policies are more likely to harm consumers than protect them. It highlights the “very low value” of consumer credit insurance (CCI) products and the unfair way they are promoted and sold to consumers.

The Aussie regulator is threatening action to get more than A$100 million back for customers stung by these insurance policies. And in the UK, customers have received NZD$55 billion after a massive payment protection insurance mis-selling scandal there, according to Reuters

Yet consumer advocates say these products are being sold in New Zealand, but there is too little scrutiny from regulators and the government. And almost no one is getting any money back.

ASIC investigated 21 insurance companies and 11 lenders, including Westpac, ANZ, Commonwealth Bank of Australia (ASB’s parent) and National Australia Bank (BNZ’s parent).

It found “harmful” sales practices including: 

- consumers being sold CCI despite being ineligible to claim under their policy. Examples included people working less than 20 hours a week being sold a policy that only kicked in if you worked more than 20 hours;

- people being sold the “life” component of CCI even though they already had life insurance;

- young, single people with no dependants (and therefore no need to protect themselves) being encouraged to get CCI cover;

- consumers being charged ongoing CCI premiums even when they had paid off their loan;

- lenders using unfair, high-pressure tactics, including giving “non-compliant” personal advice to persuade consumers to take out “unsuitable” policies.

ASIC discovered lenders and insurance companies made much more money on these policies than their customers.

“CCI is extremely poor value for money,” the report says. For CCI sold with credit cards, consumers received only 11 cents in claims for every dollar paid in premiums. Across all CCI products sold by lenders, only 19 cents was recovered in claims for every premium dollar paid.”

By contrast, the ASIC report suggests travel insurance pays out 47 cents in the dollar, home and contents is 59 cents and motor vehicle insurance 89 cents.

Source: ASIC

“This comparison illustrates that CCI, with the lowest ratio of losses to gains, is likely to be the most profitable general insurance product for insurers.”

Junk insurance

Consumer NZ's head of research Jessica Wilson says these sort of policies are widely used in New Zealand. They are offered by banks on credit cards and home loans, and also when people use credit to buy cars or home appliances. She refers to many of these policies as “junk insurance”. 

Source: ASIC

Expensive junk at that.

Take credit card repayment insurance. Of major New Zealand banks, Westpac, TSB and Kiwibank still offer credit card insurance, although Westpac says it will be gone by Christmas. While ANZ and ASB say they have stopped offering it to new customers, their websites still list the benefits of CCI policies for existing customers. As Wilson says: "No mention of refunding customers".

Subsequent to us publishing this story, BNZ told Newsroom it stopped selling credit card repayment insurance in October last year. Still, at time of writing, a BNZ Google search ad urged customers to “Give Yourself Peace of Mind by Protecting Your Repayments”. And when Newsroom contacted BNZ's customer service team, we were told by two separate people that BNZ still offered the insurance and how to sign up.

A scan of rates for banks shows most credit card insurance in New Zealand costs between 74 cents and 79 cents per month per $100 you have on your closing monthly balance. For joint cardholders it’s $1.27-$1.29 per month per $100.

It doesn’t seem like much until you add up how much a customer might pay over the long term. Newsroom couldn’t find a figure for average credit card debt in New Zealand, but in the US it’s US$5700. That's NZD$8500.

Using that figure, a couple with $8500 of credit card debt could end up paying $13,000 over 10 years. And that’s for an insurance policy that the ASIC figures suggest policyholders are unlikely to get a payout on.

Cover is often so restricted that the value consumers get is limited.

Little benefit to consumers

Wilson says the 11-19 cents in the dollar payout-to-premium ratio is shocking and reflects the way policies are often worded to give maximum benefit for the bank or insurance company - and minimum likelihood of payout.

“They tell you you are covered for temporary illness or redundancy, so you think your debt will be repaid. But the payments are often capped and the contracts contain clauses that privilege the insurer over the consumer.

“Cover is often so restricted that the value consumers get is limited.”

Wilson says New Zealand insurers don’t have to release their claims-to-premiums ratios, but she wouldn’t be surprised if the figures here were similar here to Australia.

Unbalanced and misleading

As part of its investigation, the Australian Securities and Investments Commission took a close look at online selling of credit card insurance by six banks and non-bank lenders, including ANZ, CBA, NAB and Westpac. 

What it found was unbalanced and misleading practices.

“We found lenders listed CCI under headings such as ‘card options’ or ‘setting up your card’, misleading consumers about the distinction between credit card and CCI application and information. 

“Almost all lenders reviewed did not inform consumers that interest was payable on the CCI premium if the credit card balance was not paid in full and they relied on the Product Disclosure Statement (PDS) to provide consumers with the necessary information.

“The online sales content also did not provide consumers with balanced information about the cover, exclusions, features, limits and costs of CCI.” 

Some banks want out

A string of ASIC investigations over eight years has finally seen all the big Australian banks stop selling credit card insurance across the Tasman, the ASIC report says.

Not so in New Zealand, although changes are happening.

Newsroom contacted five banks to ask about credit card insurance. Three responded in time for Newsroom's deadline - Kiwibank, ASB and Westpac.

ASB stopped selling consumer credit policies in early February 2018 following a review, an ASB spokeswoman says. But the bank still has CCI customers on its books. 

“We are comfortable that these products deliver good customer outcomes."

Westpac, which offers the cheapest CCI cover, is also getting out of the product, stopping new sales of credit card repayment cover “following a review”, its spokesman said. 

“The removal of this product is in line with our strategy to simplify our product range and our business." 

There is no mention of any pressure from regulators or its parent in Australia.

Kiwibank, the only locally-owned bank of the five, still offers credit card insurance for customers that want it, a spokeswoman told Newsroom. 

“It has recently been enhanced to widen the eligibility for customers to make claims,” she says, adding that staff have never had targets for this product.

Meanwhile, Newsroom called BNZ’s customer service centre to inquire about credit card insurance. We were told “it’s part of the card set up process” - one of the concerns raised by the ASIC report.

Credit card insurance is widely marketed in New Zealand. Illustration put together from BNZ and Westpac bank websites

Behind the eight ball

Consumer NZ’s Jessica Wilson is frustrated there hasn’t been any action from New Zealand regulators over consumer credit insurance.

“We are behind the eight ball when it comes to scrutiny.”

While the ASIC survey shows credit card insurance as being the worst value of all CCI policies, Wilson says the consumer watchdog gets the most complaints around credit insurance on vehicle loan contracts.

“Often people don’t fully understand what they are getting into. Sometimes the insurance is bundled up with the loan repayment terms and people assume they had to pay it. Or it is presented to them as part of the requirement to get finance.”

There was no possible way for them to benefit from the insurance.

That’s no surprise to New Zealand’s Commerce Commission, which has put motor vehicle financing “and related add-ons, including credit insurance”, on its priority list for 2019-2020.

A spokesman says the commission will clamp down on lenders and insurers where needed.

 “So far we have one relevant investigation underway but can disclose no further details at this time.”

He says the commission won't comment on fines, settlements or compensation for NZ consumers before any cases are completed.

However ComCom has taken action against individual companies in the past. A recent fact sheet on CCI gives an example of a New Zealand finance company offering car loan insurance.

“More than 1500 borrowers were unemployed when they took out the loan, but were still sold redundancy insurance. A clause in the contract meant that even if borrowers got a job after taking out the loan and were then made redundant, they would not be eligible for the redundancy insurance. 

“So there was no possible way for them to benefit from the insurance.”

The commission says it reached a settlement with the finance company to refund affected customers. 

The fact sheet also talks about people being persuaded to take out insurance when they bought appliances bought on credit, when those appliances would have been covered by the customers’ home and contents insurance policies.

Fair trading exclusions

Wilson says the fact insurance companies are excluded from many provisions of the Fair Trading Act means insurance policies can include clauses other companies would never get away with.

“These contracts can contain one-sided, unfair terms and they cannot be challenged by law, so it is very difficult to see how they can be beneficial to consumers.”

Consumer NZ is calling on the Ministry for Business, Innovation, and Employment to remove insurance industry exclusions when it gives recommendations to Consumer Affairs Minister Kris Faafoi on the Fair Trading Act later this year.

But Wilson says more is needed to clamp down on dodgy insurance and banking practices - and get compensation for customers.

“We are reactive not proactive. There have been some Commerce Commission prosecutions of lenders which have mis-sold this kind of credit insurance policy, but there have been no overall investigations.

“Without some sort of inquiry we just don’t know what similar products are being sold here that would be found to be rubbish.”

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