Consumer Credit Insurance (CCI)

 CCI in Australia is a type of add-on insurance often offered when you apply for a credit product like a personal loan, mortgage, car loan, or credit card. Its primary purpose is to help cover your credit repayments if you experience certain unexpected events.

However, CCI has a controversial history in Australia, with regulators and consumer advocates consistently flagging it as poor value and subject to harmful sales practices.

Coverage

CCI policies can provide some cover if:

• You lose your job: Typically covers “involuntary unemployment” (e.g., redundancy, being fired), but usually not if you resign or are self-employed.
• You become sick or injured: Covers inability to work due to accident or illness, often with waiting periods and benefit limits.
• You become disabled: Provides cover if a disability prevents you from working.
• You die: Pays out a lump sum to cover some or all of the outstanding debt.
• Credit card is stolen: Some policies offer limited cover for fraudulent use.
• Goods bought with credit are damaged, lost, or stolen: Some policies may include a limited form of goods protection.

Important Caveats on Coverage:

• Partial Payouts: CCI payouts are often less than you might expect. For example, policies sold with credit cards might only pay a percentage of the outstanding debt, not the full amount.
• Benefit Limits: There are usually limits on the amount and/or duration of the claimable benefit. For instance, unemployment cover might only pay for a few months or up to a maximum value.
• Exclusions: Policies typically have many exclusions, such as pre-existing medical conditions, age limits, or specific employment statuses.
• Waiting Periods: You often have to wait a certain period after an insured event before you can make a claim.
• Not All Debt Covered: CCI doesn’t necessarily cover all the debt you owe; it often only covers the amount you owed at the time of the insured event, which could be less than your current outstanding balance.

Average Premium

It’s difficult to state an “average premium” for CCI because:

• Varies by Credit Product: The cost depends on the type and size of the credit product it’s attached to (e.g., credit card, personal loan, mortgage).
• Varies by Cover Level: Premiums differ based on which perils are covered (unemployment, sickness, death).
• Calculated as a Percentage: Premiums are often calculated as a percentage of your loan balance or a fixed monthly fee that might be added to your loan, meaning you pay interest on the insurance premium itself, significantly increasing the overall cost.

However, the Australian Securities and Investment Commission (ASIC) has consistently found that CCI offers “extremely poor value for money.” Their reports have shown that for CCI sold with credit cards, consumers received only 11 cents in claims for every dollar paid in premiums. Across all CCI products sold by lenders, only 19 cents was recovered in claims for every premium dollar consumers paid. This indicates a very low claims payout ratio.

Trends and Regulatory Scrutiny

The Australian CCI market has undergone significant changes and scrutiny due to widespread consumer harm.

1. ASIC Intervention and Remediation:
   • ASIC conducted extensive reviews (e.g., Report 622 in 2019) that found “unacceptable sales practices, poor product design and significant remediation costs.”
   • They identified instances where consumers were sold CCI despite being ineligible to claim, subjected to high-pressure sales tactics, and incorrectly charged premiums.
   • As a result, ASIC has secured over $160 million in remediation for close to half a million consumers who were mis-sold CCI.
2. Deferred Sales Period (DSPs):
   • Effective 5 October 2021, a deferred sales period was introduced for certain add-on insurance products, including CCI. This means that if you’re offered CCI when applying for credit, the seller must wait at least four days after your credit or loan is approved before they can sell it to you. This is intended to give you time to consider if you need it and reduce high-pressure sales.
   • If a seller fails to wait for this period, you have the right to cancel the insurance and get a full refund.
3. Ban on Unsolicited Sales:
   • From 13 January 2020, ASIC implemented a ban on unsolicited “cold call” telephone sales of direct life insurance and CCI to address poor sales practices and pressure selling.
4. Product Design and Distribution Obligations (DDO):
   • Effective 5 October 2021, new design and distribution obligations were introduced under the Corporations Act. These require financial product issuers (including those offering CCI) to: 
     • Design products that are likely to be consistent with the likely objectives, financial situation, and needs of the consumers for whom they are intended (the “target market”).
     • Take “reasonable steps” to ensure products reach consumers in their defined target market.
     • Monitor consumer outcomes and review products regularly.
   • This aims to ensure that CCI products are actually fit for purpose and better meet consumer needs, shifting towards a more consumer-centric approach.
5. Lender Exits from CCI Market:
   • Following ASIC’s findings and the introduction of stricter regulations, many major banks and lenders have ceased selling CCI with credit cards, personal loans, and home loans. However, existing policies may still be in force.

Overall, the trend in Australia is a strong push away from CCI as it was traditionally sold. Regulators and consumer advocates advise extreme caution when considering CCI. It’s often recommended to:

• Check existing cover: See if you already have adequate coverage through other policies like life insurance, income protection insurance (possibly through superannuation), or even home and contents insurance (for goods protection).
• Compare alternatives: Consider standalone income protection or life insurance, which often provide broader and better value coverage than CCI.
• Understand exclusions: Always read the Product Disclosure Statement (PDS) carefully to understand what is and isn’t covered, including waiting periods and eligibility criteria.
• Don’t feel pressured: You are never required to buy CCI to get a loan or credit product.

If you have concerns about a CCI policy you’ve been sold, you can contact the Australian Financial Complaints Authority (AFCA) for free and independent dispute resolution.