Insurer IAG pumped incentives into the motor industry to build policy sales that were ‘inappropriate”, the financial services royal commission has heard.

IAG executive Benjamin Bessell said on Tuesday sales were the driver of the insurance arrangements to the exclusion of legal compliance.

“Do you think these incentive programs incentivised sales that were inappropriate?” he was asked by counsel assisting Mark Costello.

“On occasions that did occur, yes,” Mr Bessell replied.

The insurance, which was mostly sold through car dealers, covered both car finance and wheels and rims. It was a profitable area for IAG and the dealers, who sold cars in such a competitive environment that the add-on insurance was often the major area of profit.

Sales through the motor trade made up 71 per cent of IAG subsidiary Swann’s sales, Mr Bessell said.

IAG made good margins off the cover because only about 10 per cent of premiums were paid out in claims. Over a 10-year period to 2016 IAG took $1.07 billion in premiums but paid out only $107 million in claims despite about 80 per cent of all claims made being accepted, the commission heard.

The commission examined one of IAG’s incentive schemes built on total sales for a car or motorcycle dealer. Swann paid the dealer a $150,000 marketing subsidy on sales of $1.2 million and effectively encouraged the dealer to sell as many types of insurance as they could.

The deals were structured to encourage the sale of less-popular products like wheel and tyre cover.

Short-term bonus schemes were run alongside the larger programs, such as a “supercharged” scheme that incentivised employees who sold a bundle of three or four add-on products additional incentive points. The points could be redeemed by buying goods from online catalogues.

Mr Costello criticised the complexity of Swann’s product mix.