The Federal Court has hit Insurance Australia Limited (IAL), owned by Insurance Australia Group (IAG), with a $40 million penalty over pricing discount failures.
The court ruled that 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 it had promised to customers who renewed their NRMA motor, home, boat, and caravan insurance policies.
According to the Federal Court, IAL made false or misleading representations to the affected customers that their renewal premiums:
The pricing algorithm implemented by the insurer applied the discounts to a higher base premium than the impacted customers would otherwise have been charged, it outlined, resulting in failure to decrease the premiums by more than a set percentage of the customers’ premium in the previous year.
Justice Abraham, who handed down the judgment, commented: “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.’
ASIC deputy chair Sarah Court added: “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.”
The penalty is the largest imposed by the federal court against an insurer for breaches of financial services consumer protection laws.
The Australian Securities and Investments Commission (ASIC) highlighted that pricing failures are rampant in the industry.
“[The IAL] 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,” Court said.
“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.”
