Pumping insurance premiums: Are loyalty discounts a mug’s game?

Beware consumers who fall into the trap of believing that loyalty reaps rewards.

A class action launched this week against insurance giant IAG is essentially alleging a pea and thimble game is being played when calculating what loyal customers are being charged.

IAG has been accused of telling customers they were receiving loyalty discounts when it wasn’t cheaper insurance at all.Credit: Moodboard

All businesses – be they banks, supermarkets, airlines, department stores or insurers – love loyal, or “sticky”, customers. Some shower them with rewards, bonuses, gifts, better service or even discounts. It is a profitable marketing trick designed to boost revenue, and ultimately profit.

But offering faux discounts for loyalty – that just makes mugs out of unsuspecting customers.

Class action firm Slater and Gordon has homed in on the insurer IAG’s Victorian brands RAVC, SGIO and SGIC, but is investigating a similar action against another of its brands, NRMA.

The claims all deal with alleged misleading behaviour in pricing home and contents insurance products.

In a nutshell (excuse the pun) these insurance brands have been accused of telling customers they were receiving loyalty discounts that were potentially based off or referencing an artificially higher base premium. So maybe it wasn’t actually cheaper insurance at all.

Legally speaking, Slater and Gordon is alleging these Victorian insurance brands have been engaging in misleading, deceptive and unconscionable conduct by informing customers they were receiving loyalty discounts at the time of renewal.

It is a worthy reminder to consumers that shopping around is the key to getting the best price.

In the retail energy sector, regulators introduced the default market offer in 2019 – which operates as a price cap that energy companies can charge customers. It served to protect loyal (or lazy or even unaware) customers that didn’t shop around from being slugged with extortionate power bills.

In a general sense, it is easy to be lulled into believing that when you stick with a service over time it would offer some protection from price increases, especially if that is what the marketing promises.

The class action being run by Slater and Gordon piggybacks an action already in train by the corporate regulator, the Australian Securities and Investments Commission (ASIC), which claims that IAG used an algorithm that deliberately inflated premium calculations for customers perceived as more likely to stay with the insurance giant.

This algorithm allegedly measured how sticky the customer was – or how sensitive they were to higher premiums. The ASIC legal proceeding, which is ongoing, involved two of IAG’s brands, IAL and IMA.

As part of that proceeding, the regulator alleged that: “IAL and IMA misled their customers about the extent of the discounts they would receive. The way they operated their pricing algorithm meant that some longer-term or more loyal customers were allocated, or may have been allocated, higher premiums before the promised discounts were applied.

“There is a risk that loyal customers, having been promised a discount, were persuaded to stay with these companies, and in doing so, lost their opportunity to shop around for a better price,” ASIC said.

IAG disagrees with ASIC and the claims by Slater and Gordon, maintaining it has “delivered on loyalty promises made to customers” and denying that it has “misled customers about the extent of the discounts they would receive”. The insurer is defending the claims.

But it’s a bad look for IAG, which copped a $40 million penalty from the Federal Court last year for misleading and deceptive conduct involving the use of a different kind of pricing algorithm. This piece of internal computation was designed to put a floor on how low a discount could go.

Back then, it was IAG’s NRMA brand in the frame. The court found IAL made false or misleading representations to more than 600,000 customers between March 2014 and September 2019 by failing to grant the full amount of loyalty and no-claims bonus discounts promised to customers when they renewed their NRMA-branded motor, home, boat and caravan insurance policies.

Are home insurance premiums being pumped?Credit: Wayne Taylor

ASIC said the use of this pricing method meant promised discounts were not passed on and customers paid more in premiums than they had been promised.

Before anyone gets too fixated on alleged failings of IAG’s brands, ASIC declared last year that pricing failures were an industry-wide issue for insurers that will result in them paying $815 million to more than 5.6 million customers.

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