IAG Subsidiary Receives Record $40m Penalty For Misleading Customers

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.

The penalty is the largest ever 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 more than 600,000 customers, between March 2014 and September 2019, by failing to deliver the full amount of loyalty and no claims bonus discounts it promised to customers when they renewed their NRMA-branded motor, home, boat and caravan insurance policies.

“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,” said Sarah Court, Deputy Chair at the Australian Securities & Investment Commission (ASIC). “This pricing method meant promised discounts were not passed on and customers paid more in premiums than they had been promised.

According to the Federal Court, IAL made false or misleading representations to 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
  • Had their discounts applied to the base premium that IAL would have otherwise charged them

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.

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.

According to IAG, the $186 million customer refund provision that the company reported in its financial statements to 31 December 2022 is sufficient to provide for the penalty amount.

“IAG has apologised for this failure, recognised its significance and that this was unacceptable,” the company said. IAG’s focus has been on putting this right for its customers as quickly as possible. “Refunds have been issued to all customers impacted by this failure.

The company will also contact the relevant customers with the outcome of the proceedings, in line with the Federal Court judgment.

IAG said it has also engaged with ASIC on the company’s broader pricing review and remediation programme to provide refunds to customers who didn’t receive the full discounts they were entitled to.

“This case demonstrates the seriousness of these pricing failures and the importance of insurers fully delivering on their promises to customers,” said Court. “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.”

According to ASIC, pricing failures are 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,” said Court.