Last week the FMA released a report following its thematic review addressing add-on insurance and extended warranties. While directed at insurers under the Conduct of Financial Institutions (CoFI) regime, the report has potential broader application to banks, non-bank deposit takers, and motor vehicle finance lenders. This alert:
- summarises the FMA’s key findings;
- highlights the FMA’s expectations around assisting to make informed decisions; and
- sets out regulatory areas the review did not address - but which those involved with the sale of add-on insurance and extended warranties should not overlook.
Looking ahead, the FMA has signalled it will continue monitoring how insurers respond to the findings in its review and will consider the use of regulatory tools where conduct is inconsistent with legal obligations.
A full copy of the report can be found here.
What the FMA found
The review examined nine insurers underwriting add-on insurance products (including mechanical breakdown insurance, guaranteed asset protection (GAP), consumer credit insurance (CCI) and payment protection insurance (PPI)) and extended warranties often sold alongside household goods and electronics.
The core finding from the review was that, while insurers have introduced arrangements to support fair consumer treatment, those arrangements are not consistently operating in a way that provides assurance of fair outcomes in practice. The key concerns were:
- Sales pressure and distribution oversight: The intermediated, commission-based distribution model can create heightened conduct risks. The FMA identified examples of sales practices that may influence decision-making or create pressure, rather than support informed consumer choice, and observed limited evidence of oversight proportionate to these risks. This was flagged as the area requiring the clearest industry uplift.
- Product value: Claims and loss ratios for some products (particularly CCI, PPI, and GAP) were low, in some cases below 20% and as low as 3 to 6% for certain products. The FMA noted that while loss ratios should not be viewed in isolation, persistently low ratios raise questions about whether consumers, when viewed as a group, are receiving meaningful benefit from their cover.
- Consumer understanding and suitability: Insurers generally relied on disclosures and documentation, but the FMA found limited evidence that consumer understanding is consistently assessed or that product suitability is evaluated prior to sale.
- Identification of conduct risks: Insurers collected information through complaints, product reviews and claims data, but the FMA observed that this information was not always analysed, escalated or translated into action. The FMA noted varying levels of maturity across the sector in how insurers used this information.
The FMA also identified examples of good practice, including insurers that used claims experience and loss ratio data to make targeted changes to product features, pricing, and eligibility criteria where products were not delivering expected value.
Extended warranties
In relation to extended warranties, the FMA took the view that, under specific arrangements, extended warranties can be considered contracts of insurance and therefore fall within the CoFI regime. This highlights that, whatever a product is called, close analysis is required as to whether it is caught by the CoFI framework. Providers should not assume that labelling a product as an "extended warranty" places it outside the regulatory perimeter.
The FMA's conclusion that specific extended warranty arrangements can be considered contracts of insurance is interesting given that the definition of contract of insurance (which is incorporated from the Insurance (Prudential Supervision) Act 2010 (IPSA)) expressly excludes a product or service guarantee or warranty in relation to any goods or services that is given or made by the manufacturer or supplier. The Reserve Bank consulted on this point as part of the current reform of IPSA and elected to retain the exclusion for warranties in IPSA. The FMA is, therefore, presumably referring to warranties which are not given or made by the manufacturer or supplier (so do not fall within the exclusion) or which are structured so that they do not fall within the meaning of "warranty".
Supporting consumers to make informed decisions: The FMA’s expectations
One finding that warrants particular note is the FMA's articulation of its expectations in relation to assisting consumers to make informed decisions. This is not a topic that has previously been the subject of much FMA guidance since the commencement of the CoFI regime. The FMA assessed this area by considering:
- how insurers communicate with consumers before and after sale;
- how they support consumer understanding;
- how they assess suitability; and
- what assurance they obtain that consumers understand the products they purchase.
Are disclosures actually working?
The FMA said that while insurers described a range of processes to support consumers to make informed decisions (disclosures, plain-English wording, training etc), they saw limited evidence that their effectiveness is tested or validated. This creates a risk that consumers receive information without insurers having assurance that it is understood or supports informed decision-making.
Are consumer requirements being assessed?
The FMA found limited evidence of structured approaches to assessing consumer requirements prior to sale, with insurers relying on general disclosure rather than processes designed to establish suitability. Monitoring identified examples where important product features, exclusions or servicing requirements were not clearly explained at the point of sale - in some cases, consumers appeared to be expected to undertake their own due diligence.
The FMA observed that these approaches increased the risk that products are purchased without consumers understanding whether they are appropriate for their requirements, circumstances or objectives. The risks are heightened for consumers in vulnerable circumstances, particularly where financial pressure, limited time, or the complexity of a broader transaction affects their ability to make informed decisions.
Do insurers have assurance that consumers understand their products?
The FMA found that insurers had limited assurance that consumers understood key product features, limitations, exclusions, and eligibility requirements. This increases the risk of poor outcomes, including consumers purchasing unsuitable products or failing to make effective use of cover they have purchased.
Actions for insurers
The FMA expects insurers to ask themselves:
- whether consumers are receiving information and support that enable them to make informed decisions;
- whether insurers understand where consumers may struggle to understand products and what steps are appropriate to address associated risks;
- whether sales processes and distribution arrangements support meaningful consideration of consumer requirements and suitability;
- whether consumers in vulnerable circumstances receive appropriate support throughout the sales journey; and
- whether insurers obtain sufficient assurance that consumers understand key product features, limitations, exclusions, and obligations.
What the FMA's thematic review did not cover
The review was focused squarely on CoFI and took the insurer's perspective only. There are, therefore, several areas of regulatory significance it did not address. Participants across the distribution chain need to remember, therefore, to assess their positions and obligations through all applicable regulatory regimes. For example:
- Credit Contracts and Consumer Finance Act. The CCCFA imposes obligations on lenders in relation to certain insurance products and extended warranties. For example, the responsible lending provisions require lenders to make reasonable inquiries that relevant insurance contracts will meet the borrower's requirements, assist borrowers to reach informed decisions, and ensure borrowers are reasonably aware of the full implications of entering into relevant insurance contracts. The CCCF Regulations include additional provisions, including in relation to the suitability of extended warranties.
These provisions are relevant to lenders, but also to insurers where consumer credit lenders act as intermediaries. Under the CoFI regime, a financial institution must have regard to the types of intermediaries involved in the provision of its services, including in light of their legal obligations, when assessing the effectiveness of its fair conduct programme.
- Consumer Guarantees Act and Fair Trading Act. Extended warranties purport to offer protection beyond the guarantees already available under the Consumer Guarantees Act 1993, and the Fair Trading Act contains disclosure requirements and cancellation rights specific to extended warranty agreements.
Get in touch
If you would like to discuss the FMA's thematic review report or any aspect of your fair conduct programme, please get in touch with one of our experts.