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Broken promises: pricing issues bring pain for consumers and insurers 

An Australian Securities and Investments Commission (ASIC) directive for insurers to review pricing promises has resulted in a report outlining critical failings that led to undelivered discounts and misrepresentations. 

ASIC’s report, When the price is not right: Making good on insurance pricing promises, suggests that system complexities and shortcomings meant that insurers had trouble keeping track of pricing promises that had been made and were often not well placed to ensure their delivery. 

The report attributes product governance weakness to a lack of a centralised repository of pricing promises, poorly designed and administered processes, siloed decision making and inadequate product and pricing reviews. 

In an example given, some product disclosure statements (PDSs) referred to a discount the insurer never intended to provide, but the issues were not detected despite the documents being reviewed and updated – often multiple times over many years.  

Insurers undertaking the ASIC-ordered reviews notified the regulator of more than 600 situations involving potential or suspected pricing failures. The regulator found the median time taken to identify a breach was 52 days, with 35 breaches ongoing for more than five years before being identified. 

The time taken to identify failures and to investigate and identify the root cause, highlights significant concerns with insurers’ ability to manage non-financial risks, the report says. 

In a small number of cases, insurers identified pricing failures that were likely occurring at an earlier date, but decided to take no or minimal action at that time, including not remediating consumers.  

Complexities included promises being made to consumers that differed based on the distributors and brands through which the policy was sold, while there were inconsistent definitions for some discounts. 

The application of a pricing algorithm could mean a discount wasn’t applied because it would have gone below a pricing floor, there could be multiple systems for different products, and multi-policy discounts proved a problem area. 

The report also highlights that loyalty discounts offered to a long-term policyholder may not have offset the higher price that they were paying on renewal compared to a new customer. Rather than a discount, they were paying a loyalty tax. 

“General insurers should ensure they are not making misleading representations that consumers are being rewarded for loyalty, or are being ‘looked after’, or are receiving something of value by remaining with the insurer if that is not the case,” it says.  

ASIC considers that a lack of data and other forms of management information, together with the consolidation of brands in the industry across multiple legacy systems, have contributed to the scale and longevity of the issues uncovered in the reviews.  

To varying degrees across different general insurers, there was an absence of effective detective and preventative controls to identify pricing failures and stop them from reoccurring.  

ASIC says insurers had been on notice for years about the risks and missed repeated opportunities to address pricing promise problems. The issue was raised publicly in 2013, 2015 and 2017. 

The regulator finally decided it was necessary to issue a direction for insurers to undertake reviews after “significant pricing misconduct” was evidenced by increasing breach reports between 2018 and 2021. 

“It is beyond disappointing that despite past ASIC warnings and action, it took our further direction in late 2021 for general insurers to comprehensively find, fix and repay their customers for these broken promises,” Deputy Chair Karen Chester said last week. “Earlier action by insurers would have avoided much of the consumer harm we now see.” 

Remediation payments have been made to affected customers, as redress actions continue, and the Insurance Council of Australia has noted in response to the report that system and process changes have been made, and monitoring and oversight overhauled. 

ASIC says the pricing reviews have provided a roadmap for improvement, and it’s up to boards to take responsibility for making sure remediation programs are completed, change is effectively implemented and trust in the general insurance industry is rebuilt. 

“Ensuring that consumers are charged correct premiums and receive the full benefit of discounts, benefits or rewards promised is not only required by the law; it is the foundation of consumer trust and an efficient and competitive insurance marketplace,” the regulator says.