Anyone who has ever bought a car from a car workshop knows the feeling.
You are dazzled by the thought of securing your sleek new device. But the really difficult sales are about to begin.
The dealer, who has made a small margin for the actual car, has to sell some other things.
Painting window was always lucrative. Extensive guarantees have long been a winner.
But the real bonanza was in financing packages that contain insurance products that are informally known in the industry as add-on insurance.
The king of this market was Swann Insurance, owned by the listed giant IAG and was one of the biggest players in the add-on market. It used a network of car dealers, financial intermediaries and fleet managers to sell additional insurance policies, which were authorized representatives.
This was big business for IAG. Over a period of 10 years until the end of 2016, the company wrote $ 1.07 billion in premiums and paid approximately $ 107 million in claims.
No wonder that IAG was on a mission between 2013 and 2016 to defend its market share in the industry.
It did this by using the most traditional tools for financial services commissions.
As Ben Bessell, the executive general manager of corporate distribution at IAG, explained, there are several types of add-on insurance, including a loan protection insurance (covering coverage losses in case the car buyer dies or loses his job) and guaranteed asset protection or GAP insurance (which starts when a car is depreciated in the event of an accident, whereby a difference is made between the depreciated value and the outstanding amount of the loan).
And then there is my favorite: tire and rim insurance, which claims to do what is on the tin.
As Bessell explained, insurance for tires and rims was the hardest to sell. But there was a good reason for it – as the regulator of the business world has said, the stuff is often so full of exclusions (such as getting out of the way and not wearing out) that it is worthless.
Of course, IAG hoped that its dealers would take on the challenge of selling the goods by offering commissions up to 50 percent.
Several add-on insurance products were in commission rates higher than 40 percent, and IAG also offered some dealers marketing subsidies of $ 150,000 a year if they could sell more than $ 1.2 million in add-on insurance per year.
There were additional bonuses available, depending on the product mix that a dealer could sell – the more tire insurance, the better.
There was even a special encouragement program for the dealers' employees called Ignition to keep an eye on everyone.
"Do you think that this incentive program stimulated sales that were inappropriate?" asked counselor Mark Costello.
"Sometimes that happened, yes," said Mr. Bessell.
Many occasions actually. IAG would later admit that around 41,000 people had sold a higher level of coverage than they actually needed.
As we have seen so often in the Royal Banking Commission, the amount of time and money invested in encouraging sellers was far greater than the funds spent overseeing these sales.
On Wednesday morning, Costello Bessell pointed to an internal report from January 2017, which raised questions about how IAG checked whether or not its agents complied with the financial services legislation.
The report explained how these representatives received a first training and then an electronic questionnaire to follow up.
But there was no constant monitoring to ensure that the required renewed training was completed and no face-to-face audits of authorized representatives – in fact no audits to which Bessell could refer.
"Swann had no real understanding from day to day, what those authorized representatives said to consumers, right?" Early Costello.
Bessell had a punch, pointing at the training and questionnaire. But Costello was not impressed.
"It is simply not questionable, is it that Swann has made sufficient arrangements with regard to its authorized representatives who comply with the legislation on financial services?"
There were still a few questions left, but Bessell finally admitted.
ASIC began investigating add-on insurance in 2013, a process that took more than two years.
But instead of continuing to look at and solve problems with additional insurance, IAG threw out all the stops to trouble the Insurance Council of Australia's failed attempts to counter change.
"In retrospect, if Swann had his own vision, it might have been more proactive," Bessell admitted.
In December 2015, IAG told ASIC that it had serious problems. Two years later, Swann agreed to offer 67,960 customers $ 39 million in repayments.
When his evidence was finalized, Bessell admitted that many of the products that Swann sold were of little or no value.
What a joke.