Insurance Australia Limited (IAL), wholly owned by Insurance Australia Group Limited (IAG), has been penalised $40 million by the Federal Court for failing to honour discount promises made to customers who held NRMA branded insurance policies.
This penalty is the largest ever penalty imposed by the Court against an insurer for breaches of the financial services consumer protection laws.
The Court found IAL made false or misleading representations to over 600,000 customers between March 2014 and September 2019, by failing to deliver the full amount of loyalty and no claims bonus discounts they had promised to customers when they renewed their NRMA branded motor, home, boat and caravan insurance policies.
ASIC Deputy Chair Sarah Court said, ‘IAL used a specific pricing algorithm that limited the discounts renewing customers could receive, ensuring their premiums did not fall below a certain price point. This pricing method meant promised discounts were not passed on and customers paid more in premiums than they had been promised.
‘Pricing failures are unfortunately an industry-wide issue. ASIC has called on all general insurers to remove unnecessary pricing complexity and fix their systems, practices and controls to ensure they deliver on the pricing promises they make to their customers.
ASIC’s Report 765, released in June 2023, revealed that ongoing pricing failures will see general insurers repay $815 million to more than 5.6 million consumers (23-169MR).
‘This case demonstrates the seriousness of these pricing failures and the importance of insurers fully delivering on their promises to customers. In February 2023, ASIC also commenced civil penalty proceedings in the Federal Court against RACQ Insurance Limited for alleged pricing discount failures and we expect to take further court action to address this misconduct,’ concluded Ms Court.
The Court found that IAL made false or misleading representations to the affected customers that their renewal premiums:
- had been calculated as set out in IAL’s Premium, Excess and Discounts guide;
- included the full value of discounts that the customers expected to receive; and
- that the discounts were applied to the base premium that IAL would have otherwise charged them.
However, the pricing algorithm implemented by IAL applied the discounts to a higher base premium than the impacted customers would otherwise have been charged, ensuring that the discounts did not result in their premiums decreasing by more than a set percentage of their previous year’s premium.
In handing down judgment, Justice Abraham remarked ‘The Cupping Mechanism was implemented by IAL in the context of it undertaking the Go Discounts project, which was directed to changing and simplifying the way the Discounts were offered to customers, and potentially providing significant discounts to some customers. These contraventions occurred in the context of IAL intentionally designing, approving and implementing the Cupping Mechanism, where one of the considerations for its approval and implementation was its potential loss of profit if the Cupping Mechanism was not implemented.’
IAL admitted it contravened the law and the parties jointly submitted that the penalty sought by ASIC was appropriate. IAL was also ordered to pay ASIC’s costs of the proceedings.
Download
Background
Insurance Australia Group Limited (IAL & Insurance Manufacturers of Australia Pty Limited (IMA)) is remediating an estimated $447.2 million for pricing failures reported to ASIC since 1 January 2018. This is expected to be paid to customers with more than 4.2 million policies. IAL and IMA issue insurance through brands including NRMA Insurance, CGU, RACV, SGIO, SGIC and Coles Insurance.
The Court imposed the $40 million penalty in respect of the conduct that occurred from 15 October 2015 (penalty period), which involved affected customers that did not receive over $35 million in discounts.
As at 16 March 2023, IAL had completed remediation for all customers who were affected from March 2014, paying customers around $60 million.
On 24 February 2023, ASIC commenced civil penalty proceedings alleging RACQ Insurance Limited misled customers in its product disclosure statements about the pricing discounts available for certain types of insurance cover (23-038MR).