Mr Bessell described the relationship between IAG and Swann as a ‘devolved business model’,[1] where Swann was effectively a standalone business.[2] However, the person with ultimate responsibility for Swann was the head of the IAG division in which Swann sat,[3] and at all times since 2013, the CEO of IAG has been a director of Swann.[4]
The case study focused on add-on sales in the period 2013 to 2017. In that period, Swann manufactured comprehensive motor insurance and eight add-on insurance products, some of which were variations on, or replacements of, others.[5] The products were sold through its authorised representatives, which included car and motorcycle dealers.[6]
Between 2008 and 2018, Swann sold approximately 846,000 policies through car dealerships, received approximately $1.07 billion in premiums, and paid out about 10% of that amount in claims.[7] At its peak, Swann had approximately 3,000 authorised representatives selling its products throughout Australia.[8]
Three of the add-on products were a form of consumer credit insurance, namely Loan Protection Insurance, ‘walkaway’ insurance and Protection Plus Insurance.[9] Swann also sold ‘Guaranteed Asset Protection’ or ‘GAP’ Insurance, Purchase Price Protection Insurance, which was similar to GAP insurance, Mechanical Breakdown Insurance, and Tyre and Rim Insurance.[10]
Swann’s add‑on insurance products were added on to the purchase of a car or motorcycle.[11] Mr Bessell acknowledged that add-on insurance products were sold to customers, rather than bought by customers, and that, in many circumstances, the customer’s decision about whether or not to buy an add-on insurance product came after a customer had chosen the vehicle and agreed on the terms for finance.[12]
8.2.1 Authorised representatives and incentives
Swann generally engaged its authorised representatives through authorised representative agreements.[13] Under those agreements, representatives were generally authorised to provide general advice (but never personal advice) and to deal in a financial product.[14]
The agreements required the authorised representatives to, among other things, comply with the applicable laws, including the Corporations Act, and comply with all policies, procedures, guidelines and any reasonable requirements or directions given by Swann.[15] The agreements also provided Swann with the right to inspect the authorised representative’s place of business, and to conduct audits.[16] Mr Bessell said he did not know whether Swann had exercised rights under these clauses, but said that Swann regularly obtained information about, and visited premises of, authorised representatives.[17]
Under the authorised representative agreements, representatives were remunerated exclusively by commission, with different rates of commission attaching to different products.[18] The agreement usually provided for more than one commission rate for GAP insurance, because the commission increased when the customer was sold a higher level of cover.[19]
Swann also entered into ‘incentive scheme’ agreements with some authorised representatives.[20] These agreements were offered to dealers who Swann thought could ‘grow’ the business.[21] Mr Bessell explained that agreements of this type were not uncommon in the market, and were used to ensure that Swann remained competitive.[22]
The amounts paid under the ‘incentive scheme’ agreements were paid in addition to amounts paid under the authorised representative agreements.[23] Payments under the ‘incentive scheme’ agreements were calculated based on the gross written premiums for the financial year, and a factor called ‘Group Product Mix’, which was calculated by reference to the mix of different add-on products sold.[24] The rationale behind the Group Product Mix factor was that it would incentivise dealers to sell a variety of add-on products.[25]
Under the ‘incentive scheme’ agreements, authorised representatives could also be paid a ‘Performance Bonus Commission’, and a ‘Product Mix Bonus’, which was based on the gross written premiums of consumer credit insurance and Tyre and Rim Insurance.[26] Generally, Tyre and Rim Insurance was difficult to sell.[27]
In a letter to the Commission on 29 June 2018, IAG said that Swann may have breached section 145 of the National Credit Code in the course of making 153 payments to authorised representatives.[28] Section 145 prohibits consumer credit insurance commissions paid by an insurer to authorised representatives that exceed 20% of the premium (excluding government charges). In his oral evidence, Mr Bessell explained that the possible breaches were caused by the Product Mix Bonus offered to some authorised representatives.[29]
Another way in which Swann incentivised sales was through the Swann ‘Ignition Incentive Program’.[30] That program had been running since 2004, and was designed to incentivise employees of authorised representatives by providing them with points when they sold add‑on insurance products.[31] One point was equal to $1.[32] The points were redeemable online, and could be exchanged for particular products.[33] At least between 2014 and 2016, Swann also ran short-term bonus programs, which allowed employees to accrue more points when they sold a bundle of three or four products in the same transaction.[34] Mr Bessell said that Swann was not the only market participant that provided incentives to employees of dealers.[35]
8.2.2 Swann’s dealings with its authorised representatives
Swann was heavily reliant on its dealers to maintain its market share.[36]
A risk report from October 2014 recorded that Swann considered that one of its ‘risks’ was competitors’ ‘attacks’ to its dealer market, resulting in reduced market share.[37] One ‘control’ identified to protect against this risk was the commission and incentive arrangements between Swann and its authorised representatives.[38] That risk report did not record any explicit consideration of Swann’s customers.[39] Mr Bessell agreed that this was, at least in part, because Swann viewed the dealer as its customer.[40]
At all relevant times, Swann was obliged to have in place adequate arrangements for the management of conflicts of interest that may arise from the sale of its products.[41] The ‘arrangements’ that Swann had in place for that purpose were its training program and electronic questionnaires for authorised representatives, and the ability for employees to notify Swann of issues through a compliance mailbox.[42]
The purpose of Swann’s remuneration and incentive arrangements was to incentivise sales – there was no intention to incentivise any other conduct.[43] On occasions, these incentive programs incentivised sales practices that were inappropriate, and Swann’s authorised representatives engaged in sales practices where consumers were sold products that were not appropriate.[44]
Between March 2013 and January 2017, Swann maintained a ‘light touch’ approach to the monitoring of authorised representatives,[45] due in part to the prioritisation of ‘scarce resources’.[46]
As at January 2017, Swann had not responded to the changing level of risk that had arisen from the increased scrutiny of add-on products.[47] At that time, Swann had no oversight of any issues that may be occurring, because Swann’s authorised representatives were not actively recording potential breaches.[48] In addition, Swann did not undertake any monitoring to ensure that refresher training was completed, nor any face‑to‑face audits.[49] Swann’s electronic questionnaire was limited in the level of detail it captured.[50] Mr Bessell accepted that, at least between 2013 and January 2017, Swann did not have in place adequate risk management systems, particularly in light of the failure of authorised representatives to actively report breaches.[51]
Mr Bessell said that, if he were running the business today, he would not be comfortable with the level of oversight that had been in place as at January 2017.[52] He agreed that this level of oversight would not have been considered appropriate in any year since 2013.[53]
8.2.3IAG’s awareness of issues with add-on insurance
IAG was aware from late 2013 that ASIC had concerns with add-on insurance products,[54] and had understood since 2015 that ASIC’s concerns related to product design and sales practices.[55] Despite this, Swann did not take any active steps to investigate the products or sales techniques of concern.[56]
By June 2015, IAG had begun individually engaging with ASIC about its concerns with the sale of add‑on insurance as an industry participant through the Insurance Council of Australia.[57] Mr Bessell said that at that time, the industry had generally acknowledged that commission structures were either inappropriate or not financially competitive for product providers, but that no–one was prepared to move first in reducing commissions.[58] The view was that, unless there was industry reform, one particular insurer reducing commissions would not necessarily improve the customer experience.[59]
By September 2015, IAG was aware that ASIC held serious concerns about add-on insurance products.[60] IAG acknowledged to ASIC at that time that many of IAG’s consumer credit insurance products had ‘not kept pace with social change [and] technological developments’.[61]
In December 2015, Swann became aware that ASIC considered that the sale of Swann’s products through motor dealers may have contravened ‘regulatory requirements’.[62] Despite this, internal IAG documents showed that in May 2016, Swann’s primary concern about product design risks was still profit-related, and there was no consideration of whether the design of Swann’s products adversely affected consumers.[63] Swann continued with its remuneration incentive programs until at least June 2016.[64] Mr Bessell accepted that Swann’s maintenance of its market share would not have been possible had it unilaterally decreased commissions.[65]
By July 2016, IAG was aware that it had limited oversight of car dealers’ sales practices in relation to add-on insurance.[66] IAG had not reviewed Swann’s add-on insurance products to assess whether they provided sufficient benefit to customers.[67]
Mr Bessell attributed Swann’s failure to take any active steps to investigate issues within its business to Swann’s preference for an ‘industry-wide approach’ to ASIC’s concerns.[68] Mr Bessell agreed that Swann could have participated in the industry approach while also reviewing its own products and business practices.[69]
8.2.4Remediation
From August 2016, IAG commenced negotiations with ASIC in relation to Swann’s add‑on insurance products.[70] On 19 December 2017, ASIC announced that IAG would compensate just under 68,000 customers by paying approximately $39 million in respect of Swann’s add-on insurance products.[71] At the date of Mr Bessell’s statement, both estimates had been revised down slightly: it was then estimated that just over 64,000 customers would be remediated $37.1 million.[72] Swann was about half way through the remediation program, and was expected to complete the program by 31 January 2019.[73]
The circumstances in which Swann is remediating customers who were sold add-on insurance include where: the customer was unlikely to be able to make a claim under the policy; the GAP cover sold to the customer was unnecessary because it duplicated existing cover; the customer did not receive a rebate under their GAP cover when they paid out their loan; the customer was sold a more expensive level of cover than they needed; the customer was sold Mechanical Breakdown Insurance for longer than they needed; the customer paid twice for roadside assistance; and life insurance was sold to young people who were unlikely to need it.[74]
Other than comprehensive motor vehicle or motorcycle insurance sold by Swann, all products sold by Swann are the subject of the remediation program agreed with ASIC.[75]
8.2.5Current position
Swann ceased distributing its products through car dealers in August 2016,[76] and through motorcycle dealers in October 2017.[77] Swann no longer sells add-on insurance products, but continues to sell comprehensive motorcycle insurance.[78]
In 2017, Swann developed Product Design Principles applicable to its products.[79] Mr Bessell said that, if Swann add-on insurance products were sold today, they would not meet the standards under those Principles.[80]
The matter having been drawn to ASIC’s attention, it is for ASIC to determine what further action it can and should take.
[1] Transcript, Benjamin Bessell, 18 September 2018, 6082.
[2] Transcript, Benjamin Bessell, 19 September 2018, 6137.
[3] Transcript, Benjamin Bessell, 19 September 2018, 6137.
[4] Transcript, Benjamin Bessell, 19 September 2018, 6138.
[5] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, 6–7 [38]; Transcript, Benjamin Bessell, 18 September 2018, 6084–6.
[6] Transcript, Benjamin Bessell, 18 September 2018, 6086; Exhibit 6.305, June 2014, Swann Channel Strategy Business Plan FY14–17.
[7] See the figures in the tables in Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, 20–3; Transcript, Benjamin Bessell, 18 September 2018, 6088–9.
[8] Transcript, Benjamin Bessell, 19 September 2018, 6119.
[9] Protection Plus Insurance replaced Walkaway Insurance from 1 February 2015.
[10] Exhibit 6.304, Witness statement of Benjamin Bessell, 21 August 2018, 6–7 [38].
[11] Transcript, Benjamin Bessell, 18 September 2018, 6083.
[12] Transcript, Benjamin Bessell, 18 September 2018, 6083.
[13] Transcript, Benjamin Bessell, 18 September 2018, 6089; Exhibit 6.306, 1 August 2015, Corporate Authorised Representative Agreement.
[14] Transcript, Benjamin Bessell, 18 September 2018, 6090–1; Exhibit 6.306, 1 August 2015, Corporate Authorised Representative Agreement, 1, 5, 25, 28.
[15] Transcript, Benjamin Bessell, 18 September 2018, 6092; Exhibit 6.306, 1 August 2015, Corporate Authorised Representative Agreement, 3.
[16] Transcript, Benjamin Bessell, 18 September 2018, 6093; Exhibit 6.306, 1 August 2015, Corporate Authorised Representative Agreement, 3–4.
[17] Transcript, Benjamin Bessell, 18 September 2018, 6093.
[18] Transcript, Benjamin Bessell, 18 September 2018, 6090–1; Exhibit 6.306, 1 August 2015, Corporate Authorised Representative Agreement, 1, 5, 25, 28.
[19] Transcript, Benjamin Bessell, 18 September 2018, 6091–2; Exhibit 6.306, 1 August 2015, Corporate Authorised Representative Agreement, 28.
[20] Exhibit 6.307, 2 July 2013, Incentive Scheme Agreement; Transcript, Benjamin Bessell, 18 September 2018, 6096.
[21] Transcript, Benjamin Bessell, 18 September 2018, 6096.
[22] Transcript, Benjamin Bessell, 18 September 2018, 6096.
[23] Transcript, Benjamin Bessell, 18 September 2018, 6094; Exhibit 6.307, 2 July 2013, Incentive Scheme Agreement.
[24] Transcript, Benjamin Bessell, 18 September 2018, 6094.
[25] Transcript, Benjamin Bessell, 18 September 2018, 6094.
[26] Transcript, Benjamin Bessell, 18 September 2018, 6094–5.
[27] Transcript, Benjamin Bessell, 18 September 2018, 6095.
[28] Exhibit 6.311, 29 June 2018, Letter IAG to Commission.
[29] Transcript, Benjamin Bessell, 19 September 2018, 6112.
[30] Transcript, Benjamin Bessell, 18 September 2018, 6100.
[31] Exhibit 6.309, December 2014, Ignition Incentive Program Administrators Manual v4, 6; Transcript, Benjamin Bessell, 18 September 2018, 6100–2.
[32] Exhibit 6.309, December 2014, Ignition Incentive Program Administrators Manual v4, 6; Transcript, Benjamin Bessell, 18 September 2018, 6101.
[33] Exhibit 6.309, December 2014, Ignition Incentive Program Administrators Manual v4, 6; Transcript, Benjamin Bessell, 18 September 2018, 6101.
[34] Exhibit 6.310, February 2014, Ignition Super-Charged Multi-Policy Incentive; Transcript, Benjamin Bessell, 18 September 2018, 6103–4.
[35] Transcript, Benjamin Bessell, 18 September 2018, 6102.
[36] Transcript, Benjamin Bessell, 18 September 2018, 6097.
[37] Transcript, Benjamin Bessell, 18 September 2018, 6097–8.
[38] Transcript, Benjamin Bessell, 18 September 2018, 6098.
[39] Exhibit 6.308, 13 October 2014, Swann Risk Profile, 5; Transcript, Benjamin Bessell, 18 September 2018, 6098.
[40] Transcript, Benjamin Bessell, 18 September 2018, 6098.
[41] Transcript, Benjamin Bessell, 18 September 2018, 6104.
[42] Transcript, Benjamin Bessell, 18 September 2018, 6104.
[43] Transcript, Benjamin Bessell, 18 September 2018, 6105.
[44] Transcript, Benjamin Bessell, 18 September 2018, 6106.
[45] Exhibit 6.312, 9 January 2017, Oversight of Swann Authorised Representatives Report, 2; Transcript, Benjamin Bessell, 19 September 2018, 6113.
[46] Exhibit 6.312, 9 January 2017, Oversight of Swann Authorised Representatives Report, 2; Transcript, Benjamin Bessell, 19 September 2018, 6113–14, 6118.
[47] Exhibit 6.312, 9 January 2017, Oversight of Swann Authorised Representatives Report, 2; Transcript, Benjamin Bessell, 19 September 2018, 6113–14.
[48] Exhibit 6.312, 9 January 2017, Oversight of Swann Authorised Representatives Report, 3; Transcript, Benjamin Bessell, 19 September 2018, 6114–15.
[49] Exhibit 6.312, 9 January 2017, Oversight of Swann Authorised Representatives Report, 3; Transcript, Benjamin Bessell, 18 September 2018, 6114–15.
[50] Exhibit 6.312, 9 January 2017, Oversight of Swann Authorised Representatives Report, 3; Transcript, Benjamin Bessell, 18 September 2018, 6114–15.
[51] Transcript, Benjamin Bessell, 19 September 2018, 6121.
[52] Transcript, Benjamin Bessell, 19 September 2018, 6120–1.
[53] Transcript, Benjamin Bessell, 19 September 2018, 6121.
[54] Transcript, Benjamin Bessell, 19 September 2018, 6121.
[55] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, Exhibit BB-019 [IAG.502.002.0719]; Transcript, Benjamin Bessell, 18 September 2018, 6121–2.
[56] Transcript, Benjamin Bessell, 19 September 2018, 6129, 6134.
[57] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, Exhibit BB-001 [IAG.500.100.5078]; Transcript, Benjamin Bessell, 19 September 2018, 6123–7.
[58] Transcript, Benjamin Bessell, 19 September 2018, 6126.
[59] Transcript, Benjamin Bessell, 19 September 2018, 6126–7.
[60] Transcript, Benjamin Bessell, 19 September 2018, 6128.
[61] Transcript, Benjamin Bessell, 19 September 2018, 6128; Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, Exhibit BB-016 [IAG.502.002.0711].
[62] Transcript, Benjamin Bessell, 19 September 2018, 6128; Witness statement of Benjamin Bessell, 27 August 2018, 6 [36]–[37].
[63] Transcript, Benjamin Bessell, 19 September 2018, 6130–1; Exhibit 6.313, 25 May 2016, IAG Risk Profile – Swann.
[64] Transcript, Benjamin Bessell, 19 September 2018, 6131.
[65] Transcript, Benjamin Bessell, 19 September 2018, 6129.
[66] Transcript, Benjamin Bessell, 19 September 2018, 6131–4; Exhibit 6.314, 27 July 2016, Report of IAG Risk Committee Review of CCI and Add-On Insurance, 7.
[67] Transcript, Benjamin Bessell, 19 September 2018, 6131–4; Exhibit 6.314, 27 July 2016, Report of IAG Risk Committee Review of CCI and Add-On Insurance, 9.
[68] Transcript, Benjamin Bessell, 19 September 2018, 6129.
[69] Transcript, Benjamin Bessell, 19 September 2018, 6129.
[70] Transcript, Benjamin Bessell, 19 September 2018, 6134; Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, Exhibit BB-199 [IAG.505.002.4355].
[71] Transcript, Benjamin Bessell, 19 September 2018, 6138.
[72] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, 7 [39], 16 [96].
[73] Transcript, Benjamin Bessell, 19 September 2018, 6140.
[74] Transcript, Benjamin Bessell, 19 September 2018, 6138–40.
[75] Transcript, Benjamin Bessell, 18 September 2018, 6084.
[76] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, 17 [99].
[77] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, 17 [100].
[78] Transcript, Benjamin Bessell, 19 September 2018, 6142.
[79] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, 15 [88].
[80] Transcript, Benjamin Bessell, 19 September 2018, 6143.