Consumer credit insurance is the industry term for the following types of insurance:

A number of other insurance products are often sold to consumers, with the premiums being financed on loan contracts with Avco. They include

• Term life insurance: Under this policy the insurer pays a lump sum to the insured’s estate if they die during a fixed period (for example, three or five years).
• Package insurance: This is a term used by Hallmark to describe a package of insurances, that is, the one policy may provide some or all of household contents insurance, motor vehicle insurance, or income protection insurance.

Avco wholly owns two subsidiary insurance companies, Hallmark General Insurance Company Limited (“Hallmark General”) and Hallmark Life Insurance Company Limited (“Hallmark Life”). These two companies use the business name of “Avco Insurance Services”. The most common complaint that consumers make about Avco is that premiums for one or more consumer credit insurance policies with these insurers are included in the amount borrowed from Avco without their knowledge, without their informed consent, or after they have been led to believe that they must get the insurance or be refused the loan.

There are a number of financial advantages to Avco in selling consumer credit insurance policies to consumers:

• Commissions amounting to 20-25% of the premium are paid by the insurance companies to Avco. The cost of the commission is passed on to the consumer in the premium [Section 135 Consumer Credit Code prohibits any more than 25% of the premium being paid by commission to a credit provider. It is assumed that the commissions paid since the Code’s commencement comply with the law].

• The consumer credit insurance premiums can add up to 27% to the amount borrowed from Avco. The consumer must then pay interest (often at 29%) on this additional amount.

• Consumer credit insurance policies are generally very profitable with a very low rate of claims paid. Profitability of insurance can be measured by the loss ratio. The loss ratio is the ratio between money paid to consumers in claims and rebates and the money received by the insurer in premiums. Two consumer reports, in 1987 [Need or Greed: A report on Consumer Credit Insurance Australian Financial Counsellors and Credit Reform Association, 1987] and 1991 [Thirty One Cents in the Dollar - A Report on Consumer Credit Insurance from the Consumer Perspective Australian Financial Counselling and Credit Reform Association 1991], were very critical of consumer credit insurance. In 1991, only 31% of premiums paid were returned to consumers in the form of claims paid or rebates. According to “Selected Statistics on the General Insurance Industry for the year ended 31 December 1995” the loss ratios for the consumer credit insurance industry (including Hallmark General and Hallmark Life) for the years 1993, 1994 and 1995 were 40%, 43% and 40% respectively. These figures indicate a continuing uncompetitive market, despite a number of legislative reforms and legal action. By way of comparison, the loss ratios on domestic car insurance over the same period were 84%, 84% and 87%.

Many consumers cite as their experience that Avco included premiums for credit insurance policies in the amount financed without any request by or discussion with the consumer. If the consumer notices these premiums they often do not question their inclusion but simply assumes that it is part of the bargain over which they have no choice. Where the consumer queries the inclusion of a premium, they are often told that they have no choice or they are given an explanation which avoids discussing the question of whether or not the insurance policies are optional. On other occasions the conduct of Avco staff suggests to consumers that if they do not take out consumer credit insurance their loan will not be approved.

Unlike other types of insurance, the consumer typically does not have to complete an application form requiring them to answer questions so that the insurer can assess the risk. Hallmark Life and Hallmark General determine whether or not to accept the risk on the basis of the information provided in respect of the application for credit. The absence of a specific application form for consumer credit insurance further reduces the likelihood that consumers will understand first, that they are taking out insurance, and second, that it is optional.

For some policies, consumers are asked to sign a standard form entitled “Application Form - Personal Statement of Health”. The document provides standard warnings about the consumer’s duty of disclosure and asks for a positive health declaration and the name of the family doctor. It does nothing to notify the consumer that the purchase of the policy is voluntary, nor does it give the insurer any reason to assess the risk relating to the particular consumer.

While amendments to the Insurance Contracts Act (Commonwealth) 1984 attempted to address some of the selling practices identified in the industry (by introducing a pre-sale brochure, a point-of-sale notice and a post-sale letter) these reforms have been largely unsuccessful.


2.5.5. Misrepresentations about the cover offered by consumer credit insurance

Even where consumers are aware of the inclusion of consumer credit insurance premiums in the amount the are borrowing, consumers often complain that misleading statements were made by Avco staff about the coverage provided by the policy. For example, the insurance policies for sickness and unemployment contain many restrictions and exclusion clauses. These are often not explained to the insured. Sometimes the nature of the policy is described by scant or misleading explanations such as “This is in case you become unemployed”. Such an explanation can lead a consumer into thinking that they are covered for the entire period of any unemployment, whereas Hallmark General’s policy will usually only pay the monthly instalments for three months for any one period of unemployment.

Other misrepresentations that can arise include:

• that both borrowers are covered by a particular policy (for example, life cover is typically provided to both borrowers, and unemployment cover to only one); and
• that the insurance policy runs for the same period as the loan contract. In the absence of any detailed explanation the borrower will usually assume the insurance policy covers the entire period of the loan contract. This is generally, but not always the case.

Often Avco staff fail to ensure, or to verify with the consumer, that a particular insurance policy is appropriate to the circumstances and needs of that individual. There are two glaring ways in which the sale of a policy may be inappropriate:

• where the consumer is unlikely to be able to claim under the policy because of the operation of exclusion clauses or restrictions in the policy; and
• where the consumer is over-insured, in that they have overlapping insurances or insurance greater than their needs.

• sales of unemployment policies to people who are not employed at the time of taking out the policy (as the policy requires the insured to be in full-time employment when taking out the loan);
• sales of disability policies to people who suffer from a pre-existing illness (as the policies sold by Hallmark General have an exclusion clause preventing the insured from claiming in respect of such illnesses);
• sales of disability policies where a loan has been refinanced and the insured has developed a medical condition during the term of the first loan. In this case, the medical condition will become a pre-existing condition for the purposes of the later insurance policy, so that the consumer cannot claim in respect of it;
• sales of credit life insurance or term life insurance to people who already have significant life insurance through their superannuation funds or through private insurance companies;
• sales of life insurance to people who are young, single and with no dependants. In this situation the only party benefiting from the insurance is Avco;
• sales of insurance which provide overlapping coverage, for example, sales of income protection insurance, term life and credit life and disability insurance; and
• sales of insurance to a person who is not a debtor under the loan contract so that the debtor bears the cost of the insurance for the third party).