Slater and Gordon launches class action against IAG’s NRMA over deceptive ‘loyalty tax’

Insurance giant IAG says it did not mislead customers despite a law firm’s allegations an algorithm was used to increase base premiums on customers least likely to switch insurers.

Clients who were less likely to switch funds received higher premiums, the class action alleges.

Insurance Australia Group will defend itself against a class action which could potentially expose it to substantial payouts for an alleged “loyalty tax” slug linked to renewals of NRMA home and/or contents insurance policies.

The statement of claim, filed in the Victorian Supreme Court, alleges IAG, led by chief executive Nick Hawkins, engaged in misleading and deceptive conduct as well as unconscionable conduct by informing customers they were receiving loyalty discounts at the time of renewal, but not informing them that those discounts could be offset by a “loyalty tax” built into the customer’s base premium.

IAG, which runs key brands NRMA, RACV, SGIO, and SGIC, told shareholders on Tuesday that it would defend itself against proceedings taken against its Insurance Australia Limited arm.

This follows a class action lodged by Slater and Gordon in May, which IAL and IMA are also presenting defences against, and relates to loyalty offers for NRMA Insurance home, contents and home and contents insurance policies.

“IAL and IMA maintain they have delivered on loyalty offers made to customers and do not agree that they have misled customers about the extent of the discounts they would receive,” IAG said.

Slater and Gordon alleges that a pricing algorithm was used by the insurers to identify which consumers were least likely to switch to a different insurer in response to increases in their premiums.

Slater and Gordon class actions practice group leader Ben Hardwick said the algorithm then increased the base premium of those consumers.

“We’re alleging that millions of Australians paid premiums year on year for NRMA home insurance on the promise that they were getting a discount. But in reality, because of this pricing algorithm, long-term customers were unknowingly paying extra in the form of higher base premiums,” he said.

“Customers are sick of being taken advantage of by big businesses and insurers, so through this group proceedings consumers are demanding to be compensated for the loss and damages we say they have suffered as a result of IAL’s conduct.”

IAG chief executive Nick Hawkins. Picture: Nikki Short

This class action alleges that customers were denied all relevant information they should have had access to before they renewed their home and contents policies so they could have made an informed choice about whether to shop around for a better deal, or at the very least ask for a better price.

Mr Hardwick said that clients were likely to have received cheaper insurance from these brands had their loyalty not been a factor in their renewal calculations at all.

The higher the computer program identified a customer’s perceived price elasticity, the lower the annual premium increases the customer would receive. This meant loyal customers, who were assessed as having low price elasticity and were unlikely to leave, faced steeper increases to their premiums.

The legal firm claims that one client’s premium increased 53 per cent from 2023 to 2024, but the person was able to save $4000 on the same policy by entering a new name for the same cover.

The class action has been issued on a no win, no fee basis and group members will not be exposed to any out-of-pocket costs because of their participation in the claim. Slater and Gordon intends to apply, at the appropriate time, for a group costs order.

Slater and Gordon launched a separate class action in May against IAG and its RACV, SGI and SGIC brands over similar claims, alleging it told policyholders they would receive discounts on the insurance in recognition for how many years they had been with the insurer or how many other policies they held.

The Federal Court fined IAG $40m for its pricing failures relating to the NRMA brand in June last year, after action from the corporate regulator.

The Australian Securities and Investments Commission is also now suing IAG over its SGIO, SGIC and RACV brands, alleging similar discount failure with the matter set for a court appearance in October.

IAG shares on Tuesday had fallen 1.5 per cent to $8.52 by late afternoon.