Customers buying insurance through dealerships can overpay due to deals that can be more than 60pc commission, according to the City watchdog.
Some of these deals offer substandard cover and are not understood by customers, according to a report today from the Financial Conduct Authority (FCA).
The FCA found poor practices in several areas of insurance sold as an add-on to bigger purchases like cars, holidays, or white goods. The watchdog said it saw “numerous” cases of excessive commissions added to guaranteed asset protection (GAP) insurance, which covers car depreciation.
Some GAP policies that would have cost the insurer just £81 had £219 of commission added on top by the dealership and an insurance broker.
Another bad example was for “scratch and dent” insurance for cars, where commission levels averaged more than 50pc.
The FCA also found high commission levels in some travel insurance deals, warranty deals for furniture and white goods, and add-on cover such as legal expenses.
Jonathan Davidson, of the FCA, said: "Through our recent work we have continued to see poor manufacturing, sales and distribution approaches leading to sales of low value and inappropriate products, unfair treatment of claims and service issues."
The regulator has written to the chief executives of all general insurance companies about the issue and wants guilty firms to change their ways.
But Hugh Savill, of the Association of British Insurers trade body, said most of the general insurance industry worked well for customers.
Mr Savill said: “The FCA’s report is based on findings in a limited range of products, which make up a tiny part of the large general insurance market. There are clearly remaining problems in some distribution chains, and it is very important that these are addressed.”
Last month an FCA report found motorists are being overcharged by £300m a year by unfair car finance deals.
For the week’s most important personal finance news, analysis and expert advice, from pensions and property to investment ideas and savings tips, sign up to our weekly newsletter.