ASIC seeks IAG financial penalty over loyalty discounts
The Australian Securities and Investments Commission (ASIC) has asked the Federal Court to impose financial penalties against IAG over alleged harm resulting from home insurance loyalty discount representations that it says were misleading.
ASIC alleges the discounts enticed customers to renew policies, but a Demand Model was also used that assessed their sensitivity to higher renewal pricing changes and which could have led to initial premium increases that counteracted the benefits.
“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,” ASIC Deputy Chair Sarah Court said.
The action relates to Insurance Australia Ltd (IAL) brands SGIO and SGIC and the RACV brand, where policies are provided through the Insurance Manufacturers of Australia (IMA) joint venture. It focuses on home and contents cover and discounts for length of time a customer has held a product and the number of policies
IAG says that it will contest the allegations.
“IAL and IMA maintain they have delivered on loyalty promises made to customers, do not agree that they have misled customers about the extent of the discounts they would receive, and intend to defend the proceedings,” it said.
The ASIC Concise Statement filed with the court says the calculation for renewing customers involved determining an initial premium, then deducting any discounts and finally adding any government charges.
A Demand Model was used to predict a customer’s likelihood of renewing their policies at different prices as part of the process for determining the initial premium.
The factors included the number of years since a home policy was first taken out, consecutive years with the same brand and the number of same branded policies for other types of cover held and loyalty discounts received.
“The output of the Demand Model was used in the Renewal Optimisation process for the purpose of allocating a smaller relative price increase to the policies that were predicted to be less likely to renew at higher prices; and a larger relative price increase to the policies that were predicted to be more likely to renew at higher prices,” it says.
ASIC says IAG knew that the Demand Model had the purpose of allocating a smaller relative price increase to the policies that were predicted to be less likely to renew at higher prices; and a larger relative price increase to the policies that were predicted to be more likely to renew at higher prices.
But it says IAG “unreasonably did not satisfy itself” that the use of the Demand Model in setting customers' initial premiums didn’t offset, or impair, the benefit of the loyalty discount.
The ASIC documents say customers were discouraged from shopping around on the basis that they were receiving discounts that would not be available if they moved to another insurer, and may have been denied the opportunity to seek cheaper quotes.
“Insurers should not promise discounts unless they are confident that they can and will deliver them in full,” Ms Court said. “The failure by insurers to deliver on pricing promises is a key priority for ASIC and we will continue to take enforcement action to hold insurers to account.”