The Commonwealth Bank credit card insurance scandal is the “tip of a very large iceberg”, legal experts have warned.
Philippa Heir, a senior solicitor at the Consumer Action Law Centre, welcomed the bank’s promise to repay $10 million to 65,000 students and unemployed people sold dodgy credit card insurance.
“Unfortunately it’s very widespread,” she told The New Daily.
“We’ve seen misselling of this sort of insurance on a large scale.”
On Monday, corporate regulator ASIC revealed that CBA – already mired in a money-laundering scandal – had agreed to refund about $154 to each of the 65,000 affected customers, who were sold ‘CreditCard Plus’ insurance between 2011 and 2015 despite being unable to claim for payouts.
CBA told the market it “self-reported the issue” to ASIC in 2015, and that the insurance was “not intentionally sold to customers who were not eligible”.
It was an example of what Consumer Action calls ‘junk insurance’, which is where inappropriate insurance policies are slipped covertly into the paperwork for car loans, credit cards and other financial products, or where the salesperson pressures the customer to buy unsuitable coverage.
Ms Heir said the CBA example was by no means an isolated case, and that many victims were poor.
“People who’ve spoken to us say they were told they had to [pay for insurance] or they would not qualify for finance for the car they needed to support their family. So this is affecting people on lower incomes significantly.”
Last year, ASIC published the results of a three-year investigation of add-on insurance sold by used car dealers. Its sample group paid $1.6 billion in premiums for only $144 million in payouts.
This amounted to an average payout of nine cents per dollar of premiums, compared to 85 cents for comprehensive car insurance, ASIC reported.
Consumer Action has set up a website to help Australians claim refunds from insurers. More than $700,000 has been claimed so far.
Here are the potential warning signs that a policy may be unsuitable.
Be wary of pressure selling
Consumer Action’s Ms Heir said high-pressure sales tactics were a danger sign.
“The key is, if you’re being put under pressure to buy insurance, that might ring alarm bells that you should shop around.”
An independent review of the banking sector, released in January, contained shocking revelations from bank staff who reported being forced to oversell financial products, including unnecessary insurance.
One anonymous bank teller said: “If I do not meet my daily sales target I have to explain how I will catch up at morning meetings of the team. I am behind in sales of wealth and insurance products and need to catch up to keep my job.”
Be wary of add-on insurance
ASIC’s recent investigation related specifically to add-on general insurance policies sold by used car dealers. It found “serious problems in the market”.
These add-on policies cover risks relating either to the car itself, or to the car loan. Examples include ‘consumer credit insurance’ and ‘tyre and rim insurance’.
Consumer Action agreed it was a high-risk area.
“One person we spoke to spent $20,000 for add-on insurance on a $60,000 car loan, so it took that loan from $60,000 to $80,000, which is hard to even comprehend,” Ms Heir said.
Be wary of insurance for small losses
An expert on investor behaviour, Dr Michael Finke of Texas Tech University, warned in a recent financial literacy series that fear of losing money temps consumers to buy unnecessary insurance.
Buying a policy is “rational” only when the probability of losing money is low and the size of the potential loss is high, Dr Finke said.
“It’s a good strategy to make sure that you let the small ones go so you can focus on insuring bigger losses.”
He recommended setting a “risk retention limit” – a dollar figure below which you don’t insurance yourself.
“This limit should be based on your wealth and your ability to cover a loss if it happens,” he said. “This may mean keeping a little bit more money in a liquid savings accounts just in case.”