ASIC identifies a market failing consumers in the sale of add-on insurance through car dealers.

In a scathing report recently released by ASIC, the regulator highlights that in some instances insurance companies are paying up to 79% of the premium paid by a consumer to car dealers and those arranging the insurance but only 9% of the premium is paid back to consumers by way of approved claims.

ASIC Deputy Chairman Peter Kell said there were "serious problems" in the add-on insurance market that needed to be reviewed immediately by insurers.

"ASIC will be undertaking further work, including potential enforcement action, to ensure that this market delivers acceptable outcomes for consumers," he said.

"We will also be looking at how insurers can refund consumers who have been sold inappropriate products."