IMPACT ANALYSIS: Insurers must review pricing systems after ASIC civil penalty action against IAL

The Australian Securities and Investments Commission (ASIC) has launched civil penalty proceedings in the Federal Court against Insurance Australia Ltd (IAL).

Following IAL’s failure to honour discount promises valued at approximately A$60 million to at least 596,000 customers. IAL is also alleged to have engaged in conduct that was misleading and deceptive, which included making false representations to customers in relation to the promotion of financial services.

IAL self-reported the misconduct to ASIC on September 9, 2019.

Compliance teams at insurers need to understand the wide ramifications of this case and ensure that they continuously review their pricing systems. 


Between March 2014 and September 2019, IAL offered motor, home, boat and caravan insurance policies to the public; overall, IAL had 13 different types of insurance product. During this period, IAL offered a loyalty discount and a no-claims bonus discount to customers upon contract renewal. The representation in relation to the discounts was that the premium payable by the customer on renewal was to be a gross premium, less applicable discounts.

In about July 2013, IAL introduced a “cupping mechanism” to its automated system, which involved the use of computer-generated algorithms to calculate insurance premiums and the renewal of existing insurance policies. It is unclear whether there were systems in place to review the calculations made.

In or about March 2014, IAL introduced limits on reductions on the renewal premiums in relation to the offered insurance policies through the cupping mechanism. This had the effect of reversing the application of discounts from the final premium and increasing the gross premium prior to the re-application of any discounts to the customer. 

In other words, customers did not receive any of the discounts that had been promised or represented by IAL, nor did IAL disclose its existence of the cupping mechanism to affected customers.

The cupping mechanism was applied around 1,785,000 times, affected at least 596,000 customers, involved around 705,000 separate insurance policies and resulted in customers being deprived of represented discounts of approximately A$60 million.

The documents that ASIC has lodged with the Federal Court allege IAL failed properly to take into account changes to the computer-generated algorithms it used to apply the cupping mechanism to customers, or to spend insufficient time reviewing the implications of the calculations.

There appear to have been no processes or controls in place to enable the IAL compliance team to check the working of the cupping mechanism or the recalculations of gross premium, to assess whether customers were being offered appropriate discounts. For example, there was no assessment of whether customers were being offered a higher premium than they might have been, had the cupping mechanism not been in place.

Review of pricing systems

Insurers must prioritise a review of their pricing systems and controls, ASIC has said. It has also warned insurers that they may need to update legacy IT systems and make improvements across compliance, governance and culture. 

“ASIC is calling on general insurers, including IAL, to ensure customers get the full discount they are promised. This follows industry-wide failures that have led to insurers repaying more than A$400 million to over two million home, car and other insurance customers since 2018. All insurers should take urgent steps to ensure they can and do meet the pricing promises they make,” said Sarah Court, ASIC deputy chair.

Insurers would be well-advised to reassure themselves that they are able to identify any differences between the prices they have promised customers in the past five years and what customers are being charged. They should also establish whether there have been any miscalculations.

Insurers which have used computer-generated algorithms as part of an automated system may need to conduct calculation reviews, with compliance oversight, to ensure the right pricing policies are being applied to existing customers, and that any discounts or representations made in documentation are accurate.

Where customers are found to have been overcharged, insurers will need to put a remediation scheme in place to refund those who have overpaid premiums.

If insurers do find that they have made mistakes, they should be conscious of their breach-reporting obligations to ASIC and to the Australian Prudential Regulation Authority (APRA). 

Scrutiny builds on Australian casino sector, as Star stands in regulator’s spotlight
IMPACT ANALYSIS: Directors of Queensland wealth group, lawyer face criminal insolvent trading charges

This article first appeared on Thomson Reuters Regulatory Intelligence.

Niall is a senior regulatory intelligence expert, Asia Pacific.  He joined Thomson Reuters in 2013 from FTI Consulting, where he was managing director for investigations in Australia.  Prior to that, he was was a senior specialist advisory for the Australian Securities & Investments Commission (ASIC) and the director of enforcement for the Dubai Financial Service Authority (DFSA).

Niall is a Barrister of the High Court of Australia and has over twenty years experience in financial markets and international regulation. In 2002, he was awarded an ASIC Australia Day Honour Medal for his work in corporate investigations.  He has written a book on corporate investigations published by Thomson Reuters and has been a commentator in the Australian Financial Review and television on financial crime, regulation and compliance.

Leave a Reply

Subscribe to Business Insight

Discover best practice and keep up-to-date with insights on the latest industry trends.