Sky-high remuneration, unfair sales practices, excessive costs, stingy compensation rates. These are some of the findings in the Autorité des marchés financiers’ first report on insurance sales by automobile dealers.
Anyone who has ever bought a new vehicle knows there will be some solicitation involved. They also know that consumers are not always given the most complete information. The Autorité des marchés (AMF), the organization responsible for financial regulation in Quebec, recently focussed attention on this situation. For the period from July 15, 2013 to June 15, 2019, 74% of issues reported to the AMF in connection with insurance distributed without a representative were attributable to an auto dealer.
These reports led the AMF to attempt to determine the causes of this level of consumer dissatisfaction. It began by asking insurers to provide it with data related to the sale of insurance. Twenty insurers complied by providing information for the years 2016 to 2018. The agency used this data as the basis of its analysis, the findings of which are to be found in the 2016-2018 Insurer Disclosure Analysis Report. And they are shocking!
High remuneration rates
In Quebec, dealers are allowed to sell consumers only two insurance products: replacement insurance, and debtor life, health and employment loss insurance. The number of insurers they deal with is generally limited. According to Mario Beaudoin, Director of Alternative Distribution Practices in Insurance at the AMF, there were essentially only two insurers who offered these products at the time the study was conducted.
Consumer solicitation is most intense when it comes time to sign the car purchase documents, which is when dealers judge circumstances to be most in their favour. “The consumer is happy,” Beaudoin says. “Buying a vehicle is an exciting event. But things are happening quickly. There are lots of papers to sign, a lot of numbers involved. Many consumers may not be comfortable with all that. So we make the process easier by including the sale of insurance products.”
To make sure they are in the right place at the right time, the insurers pay dealers an extremely high fee. In 2018 alone, dealers received nearly $237 million in remuneration. In that year, they sold just over $424 million worth of premiums. This means that their remuneration represented about 56% of the total volume of insurance premiums paid. These numbers alone are cause for concern.
There are other issues, including some highly questionable sales practices. “Certain consumers tell us, ‘They started off by giving me a bunch of information about insurance, then they told me about rustproofing and then they went back to insurance,’“ Beaudoin said. “This situation is far from optimal for the consumer.”
There is also the fact that the price is rarely clearly stated.
“When people are offered insurance, they are not told, ‘Your insurance is going to cost $2,300,’ Instead, they’re told: ‘Your insurance is included in the price; it’s going to be this much per month.’ ”
Mario Beaudoin, Director of Alternative Distribution Practices in Insurance at the Autorité des marchés financiers
In addition, dealers sometimes exert undue pressure on consumers to purchase insurance from them, even going so far as to tell them that the insurance is compulsory. “But that’s not true,” Beaudoin says. “It’s never mandatory to buy insurance from a dealer, except in very rare cases. It’s important for consumers to know that they can always turn to their own insurer to get the coverage they need.”
For those who refuse to buy the product, some dealers go so far as to suggest they take out the insurance for a period of 180 days and then cancel it. It just so happens that 180 days is the time it takes for the dealer to receive his remuneration from the insurer.
The problem is not new. As a matter of fact, the AMF has tried several times to resolve it by lengthening the period before remuneration is paid – this was initially 10 days before being increased to 30, then 90 and finally 180 days. Each time, the industry adjusted its practices accordingly. “Generally, you would expect there to be a correlation between the period for earning remuneration and the life-span of the product purchased,” Beaudoin says. It is worth noting that one in four policies purchased from a dealer is terminated before the end of the contract.
Consumers who agree to purchase insurance for a 180-day period are often disappointed. They believe that when they cancel their insurance, their payments will go down. But that’s not what happens,”
In fact, the payments stay the same; it’s the repayment period that goes down. Again, there seems to be a problem with the information given to consumers.
Expensive, sometimes useless products
The report also reveals shortcomings in the cost of the insurance products and the coverage they provide.
In the case of replacement insurance, the first flag raised is with the price. Even though this insurance appears to be similar to the replacement cost clause in traditional auto insurance contracts, the price is 62% higher. This is why it is so important to compare the products the dealer offers to those you could obtain from an independent insurer or one that you already have.
For the same insurance, there is also concern about how little compensation consumers actually receive. For example, in 2018, the average price of replacement insurance was $2,005, while the average amount of compensation paid was $2,851, a difference of only $846!
In the case of life, health and job loss insurance, there is ample reason to doubt that consumers are always informed of its many exclusions—those affecting seasonal or self-employed workers, for example. Another cause for concern is in the large number of claims that are refused: when the insurance is sold by a dealer, the refusal rate is 29%, compared to 5% for short-term insurance and 12% for long-term insurance, which are equivalent group insurance products. “I find it hard to imagine consumers buying insurance if they knew they were ineligible for it or that the refusal rate was so high,” Beaudoin says.
If they want to obtain products that meet their needs, consumers need to be given as much information as possible before making a decision. This is what Mario Beaudoin advises, pointing out that the AMF has issued a fact sheet designed to inform consumers of their rights, and requires that it accompany every offer of insurance. If consumers are aware of the “replacement value” protection offered by their insurer and know what group insurance they have, if any, they can make an enlightened choice. For the time being, this is the best way for them to protect themselves.
In June 2020, the Autorité des marchés financiers (AMF) published the 2016-2018 Insurer Disclosure Analysis Report, which deals with the supply of insurance products through automobile, recreational vehicle and leisure vehicle dealers in Québec. Based on its analysis of data collected from 20 insurers for the years 2016 to 2018, it provides an overview of the market for insurance products offered by dealers until December 31, 2018. It establishes guidelines that will enable the AMF to measure the impact of its interventions and, ultimately, help improve dealers’ practices.
In the other parts of Canada
Because the study in question refers specifically to the situation in Québec, one might conclude that it is the only province to have problems with the sale of insurance by dealers. It is not. According to George Iny, President of the Automobile Protection Association (APA), the situation is sometimes worse elsewhere.
In recent years, the APA has conducted anonymous surveys in Ontario, British Columbia and Alberta. These surveys have shown that consumers have difficulty obtaining a copy of their insurance contract before committing themselves and that they have to rely on the word of the salesperson or sales manager, or on the written information presented to them. The surveys also reveal that when they sign the contract, elderly people or those with pre-existing medical conditions are not always informed of the exclusions that apply to them. Finally, they expose certain deficiencies in cooperation between the body responsible for monitoring dealer practices and the body responsible for monitoring the sale of insurance products, a situation from which dealers benefit unfairly.