Australia’s Fed penalises Insurance Australia Group

Its wholly-owned subsidiary provided misleading information over pricing discounts.

Insurance Australia Group’s (IAG) wholly-owned subsidiary, Insurance Australia Limited (IAL), which has been penalised by the Australian Federal Court.

A penalty of AU$40m has been imposed on IAL due to false discount promises toward customers who held NRMA branded insurance policies.

This is the largest penalty ever imposed on an insurer by the court for violating consumer protection laws in financial services, the Australian Securities and Investments Commission (ASIC) said in a statement.

IAL deceived over 600,000 customers between March 2014 and September 2019 by failing to provide the full loyalty and no-claims bonus discounts promised when renewing their NRMA-branded insurance policies for motor, home, boat, and caravan. 

The company used a pricing algorithm that restricted discounts, resulting in customers paying higher premiums than promised. 

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ASIC Deputy Chair Sarah Court emphasised the need for insurers to eliminate unnecessary pricing complexity, improve systems and practices, and honour pricing commitments to customers.

In June, ASIC's Report 765 disclosed that due to continued pricing failures, general insurers will have to reimburse over 5.6 million consumers a total of AU$815m.

The court determined that IAL provided false or deceptive information to its customers: The calculation of renewal premiums adhered to IAL's Premium, Excess, and Discounts guide; renewal premiums included the complete value of anticipated discounts; discounts were applied to the base premium that IAL would have otherwise applied.

Unfortunately, IAL's pricing algorithm deviated from the promised discounts. Instead of applying the discounts to the customers' actual base premium, the algorithm applied them to a higher base premium. 

This ensured that the discounts did not lead to a reduction in premiums exceeding a predetermined percentage compared to the previous year's premium.

IAL acknowledged its violation of the law, and both parties agreed that the penalty proposed by ASIC was suitable. Additionally, IAL was directed to cover ASIC's legal expenses associated with the case.