IAG subsidiary fined record $40m fine for deceiving customers on NRMA discounts

The Federal Court handed its largest ever insurance penalty, saying IAG’s subsidiary deceived hundreds of thousands of customers.

IAG apologised for its “failure” in overcharging customers.

An IAG subsidiary has been fined $40m by the Federal Court, in the largest penalty reached by the corporate watchdog on the sector, for deceiving hundreds of thousands of customers that paid over $1.1bn in home, motor, boat and caravan insurance premiums.

Insurance Australia Limited offered loyalty and no-claim discounts to over 600,000 NRMA clients that bought insurance for five and a half years until September 2019 but then designed a mechanism labelled “cupping” to reduce those discounts without telling them, pocketing about $60m in promised discounts.

“It is plain from those figures that the number of affected customers and the size of the combined losses in the tens of millions of dollars is significant,” Judge Wendy Abraham said in her judgment on Friday.

“It is also plain that when customers incurred losses because the discounts were not passed on in full, the cupping Mechanism was operating to increase or preserve IAL’s revenue, which was a key consideration for implementing the cupping mechanism,” she said.

The regulator took action against Australia’s largest insurer in October 2021, accusing its subsidiary of engaging in deceptive conduct to protect its revenues as some customers would have sought to change insurers if they had known the discounts being offered weren’t all true.

IAG apologised for the “failure” at the time calling it “unacceptable” conduct and has refunded customers impacted.

It booked a customer refund provision that as of the end of June 2022 carried a balance of $309m to cover refunds, interest on those refunds, the costs of administering the associated program, and “other pricing-related matters”. That had reduced to $186m by the end of December. On Friday IAG said that was enough to cover the fine.

The company has enhanced its systems and processes for the delivery of discounts and has “significantly” improved risk culture, it said at the time.

The cupping mechanism was removed in September 2019 when the issue was identified, according to an IAG media representative.

Justice Abraham said that while the insurer intentionally designed, approved and implemented the cupping mechanism to reduce discounts to customers without telling them “where one of the considerations … was its potential loss of profit if (it) was not implemented” she said she accepted the insurer’s position that “there was no intent to mislead”.

Her judgment also orders IAL to pay ASIC’s costs and to publish a link, on NRMA Insurance’s website, to a written notice “for failures to honour discount promises made to some consumers who held NRMA Insurance policies issued by IAL”.

The insurer must also write to affected people that continue to be customers to inform them about the court orders and attach a written notice.

The written notice must say: “The Federal Court of Australia finds that Insurance Australia Limited (IAL) made false or misleading representations to some consumers about applicable discounts for policy renewals.”

“IAL admitted that it had broken laws prohibiting it from making false, misleading or deceptive representations shortly after ASIC commenced proceedings against it and has apologised for its conduct.”

In a statement to the exchange, the insurer said it would “contact the relevant customers with the outcome of the proceedings” in lie with the judgment.

“IAG has engaged with ASIC on this matter and on IAG’s broader pricing review and remediation program to provide refunds to customers who didn’t receive the full discounts they were entitled to,” it said.

The judgment follows ASIC’s warning last week that the industry still had unnecessarily complex systems to price policies.

The industry has billed insurance customers $815m more than they should have paid for their cover, according to ASIC’s long-running review of the industry that was triggered after its action against IAG in 2021.

IAG is not the only insurer to have faced legal action from ASIC, with Brisbane-based RACQ also dragged to court over its failures.

‘Today’s $40m penalty is the largest ASIC has successfully sought against an insurer,” ASIC deputy chair Sarah Court said in a statement.

“This sends a strong message of deterrence to the industry. Insurers need to put their customers first and ensure that is reflected in their pricing practices.”

In a report last week, the regulator said some insurers still did not have adequate product governance mechanisms in place, with systems, data and controls still failing to ensure the industry delivered on pricing promises to customers.

The regulator said insurers should remove all unnecessary pricing complexity from their models and fix their systems “so they can deliver on the pricing promises they make to their customers”.