Add-on car insurance loss ratios expose a model built on not paying claims

The numbers don’t survive scrutiny

The Financial Markets Authority’s review of add-on insurance sold at the point of vehicle purchase has landed, and the loss ratios are the kind of figure that ends a business model. Some products, particularly guaranteed asset protection (GAP) and consumer credit insurance (CCI/PPI), showed loss ratios as low as 3% to 20%, meaning insurers paid out as little as $3 to $20 for every $100 collected in premiums.

The FMA’s language is deliberately understated but pointed. Persistently low ratios, the regulator said, “raise questions about the extent to which consumers, when viewed as a group, are receiving meaningful benefit from these products.”

This is not a new complaint. The Commerce Commission’s 2021 review found New Zealanders spent roughly $548 million in retail premiums on add-on products over three years. Consumer NZ’s 2022 analysis put it at $442 million in premiums against just $128 million in claims paid out between 2018 and 2020. Repayment waiver data was worse still, with the Commission’s 2021 report showing $37.7 million in premiums against $2.7 million in claims in FY18.

Commission at the point of maximum vulnerability

The structural problem is simple. The moment a buyer is focused on driving away is precisely when they are being sold complex financial products, by a salesperson who earns commission on each one. In 2020, Consumer NZ found dealers earned on average between $304 and $636 in commission per add-on insurance sale. The incentive is to sell, not to advise.

The FMA review found sales tactics that manufactured false urgency, giving buyers the impression a specially approved deal was time-limited when it was not. Consumers who already held equivalent cover were sold duplicates. The Commission’s earlier work showed how poorly the products were understood: of 62 customers surveyed, 13 didn’t understand what they had bought, eight were unaware they had bought an add-on at all, and 14 thought it was compulsory. In the worst cases, so many add-ons were financed alongside the vehicle that the total payable over the loan exceeded double the car’s price.

The compliance line has moved

The key shift for anyone selling these products is that the regulator has closed the outsourcing escape hatch. FMA director Michael Hewes said insurers “cannot outsource the responsibility for fair consumer outcomes” even where products are sold through third parties. The review found a recurring gap between the oversight insurers described on paper and how those controls actually worked in the yard, with distribution oversight flagged as the weakest area.

That matters because the Conduct of Financial Institutions (CoFI) regime, phased in from 2023, extends fair conduct obligations right through the distribution chain. A dealer acting as an intermediary for an insurer or lender is now operating in a scrutinised environment where the regulator has already found systemic gaps. And enforcement is escalating: insurers have faced close to $29.8 million in penalties and enforceable undertakings over 12 months, including a $19.5 million penalty against IAG New Zealand in October 2025 for fair dealing breaches across multiple brands and distribution partners.

What the products actually deliver

Stripped back, the value proposition is thin. Mechanical breakdown insurance often provides no more cover than the Consumer Guarantees Act already gives, with extensive exclusions. A 2024 NBR report featured a buyer whose $20,000 Jeep Renegade lost power less than 18 months after purchase, illustrating the gap between what MBI promises and what it pays. CCI/PPI, meanwhile, excludes anxiety, stress and natural disasters, and in 2022 Consumer NZ noted three of four providers only paid out after 28 to 30 consecutive days of redundancy. GAP is the most defensible of the trio, but its loss ratios remain low.

New Zealand is the outlier

Both Australia and the UK have already banned add-on insurance sales in the car yard and imposed a mandatory cooling-off pause between buying a car and buying the insurance, a deferred sales model. A 2023 Victoria University Law Review analysis advocated the same approach for New Zealand, arguing the sector as structured does not promote competition and facilitates consumer harm.

The industry’s counter, made in 2022 by the Insurance Council, was that better enforcement of existing law was the right answer rather than structural reform, with voluntary price caps and extended cooling-off periods offered as evidence. That argument is now much harder to run, because the FMA’s review is precisely the finding that the voluntary approach has not closed the gap between policy and practice.

The commercial reality for dealers is stark. The finance and insurance desk is a serious margin contributor. If a deferred sales model is eventually imposed, as it has been across the Tasman and in Britain, that revenue is not merely compliance-adjusted, it is structurally disrupted. The dealers and lenders reviewing their commission structures and disclosure practices now, before enforcement, will be the ones still standing when the model is forced to change.

Sources

• Buying a new car? Be careful of agreeing to insurance packages (2026-08-23)
• FMA’s add-on insurance review lands as commission scrutiny widens
• Add-on car insurance products offer meagre benefits to consumers (2022-10-25)
• Motor vehicle financing and add-ons review (2021-11-10)
• Steer Clear: Analysis of New Zealand’s Motor Vehicle Add-On Insurance Industry (2023-11-21)
• Enforcement Key to Consumer Protection, NZ (2022-06-15)