As highlighted in our initiation research, ASIC has been undertaking a review of the sale of add on general insurance policies through car dealers. Today ASIC released a report detailing what it considered various failings
ASIC will be undertaking further work, including potential enforcement action and potentially looking at how insurers can refund consumers who have been sold inappropriate products.
This is a continuation of the original ASIC investigation which released its first report in February 2016. As disclosed in our initiation research
and the investment memorandum, the industry through the Insurance Council of Australia (ICA) has been working with ASIC over the last six months or so.
Eric’s management stated that “The industry is fully aware of ASIC’s issues and believes a sustainable long term solution will be agreed that will mitigate any further need for regulatory intervention. The ASIC report contained no surprises and is consistent with expectations.”
The ICA said insurers would seek to cap commissions at 20% to reduce incentives for "inappropriate sales practices". Insurers will also improve disclosure, customer communication and sales systems.
Such action has previously been highlighted and in our conversations, management was not overly concerned. Particularly in regard to the proposed cap on commissions, management believes this would lead to a higher market share given the economies of scale of its business model.
Further with knowledge of this review and the regulatory environment, existing shareholders increased their exposure to the business as part of the acquisition to Swann.
Also of note is the development of Eric’s new product distribution system (Touch). A benefit of the system is that the consumer interacts directly to make choices rather than be pressured by a sales person. Management believes that this should help to address any regulatory issues from ASIC over pressuring of consumers.
Eric will be releasing a formal response in due course.
The ASIC report can be viewed here.