An insurer offered car dealerships as much as 50 per cent in commissions and other incentives to drive sales of "junk" add-on insurance.
Before it stopped selling the add-on products, Swann Insurance earned $1.07 billion in premiums from policies sold through car yards over a decade and only paid out a tenth of that in claims.
Its commission and incentive arrangements for car and motorbike dealerships were designed to drive sales, the banking royal commission heard on Tuesday.
But it also led to the sale of expensive add-on products that were of little or no value, or what consumer groups label junk insurance.
Swann, which is part of Insurance Australia Group, is refunding $39 million to 67,690 customers over six add-on products.
The royal commission heard most new car dealerships have very thin margins on their car sales and rely heavily on the sale of products such as parts, servicing and add-on insurance for their profitability.
Counsel assisting the commission Mark Costello asked if heavily incentivising a business that is heavily reliant on the income from a particular product line is more likely to result in inappropriate sales.
IAG executive Ben Bessell said there had been examples of that.
Asked if Swann's incentive programs incentivised sales that were inappropriate, Mr Bessell said on occasions that did occur.
Swann paid dealers commissions up to 50 per cent on products such as tyre and rim insurance and gap insurance, which pays the different between the amount owed and what a car is insured for under comprehensive cover if the vehicle is written off.
It also offered additional payments under incentive schemes to about 30 per cent of dealerships, as well as giving employees the chance to earn reward points that could be redeemed for goods.
Mr Bessell said the incentive agreements were offered where Swann thought it and the dealership could grow their business.
"I also think there was an element of market forces here where in a competitive market these types of agreements were not uncommon," he told the inquiry.
"If we were to keep a business or an authorised representative or obtain one, these agreements would need to be put in place."
The regulator found insurers paid more than $600 million in upfront commissions to car dealers for the sale of-add on insurance products over a three-year period.
The insurers together collected $1.6 billion in premiums and paid out only $144 million in claims, the Australian Securities and Investments Commission found.
Swann is one of five insurers refunding $118 million over add-on insurance sold through car dealerships to almost 213,000 people.
Swann stopped offering add-on insurance products through car yards in August 2016 and through motorbike dealers in October 2017.
