IAG NZ self reporting to FMA results in civil court case alleging breaches of the Financial Markets Conduct Act

The Financial Markets Authority (FMA) has filed a civil court case against general insurer IAG New Zealand (IAG) alleging fair dealing breaches affecting about 269,000 customers resulted in overcharges valued at about $35 million.

The civil proceeding against New Zealand’s largest general insurer comes after IAG NZ self-reported historical failures in the application of discounts to some customers and miscalculation of government levies, according to IAG NZ. The case has been filed at the High Court in Auckland.

IAG's self reporting follows the FMA’s conduct and culture reviews of banks, life insurers, and fire and general insurers completed in 2021. The alleged breaches arise from IAG’s failures to correctly price premiums charged to customers, and its failures to correctly advertise and apply important discounts to its insurance products sold via its business divisions and distribution partners, the FMA says.

The FMA said on Friday approximately 269,000 customers were affected by the pleaded breaches from IAG NZ, which had resulted in overcharges of approximately $35 million, with a net gain to IAG of approximately $31.1 million.

Although some of the issues date back more than 20 years, the FMA said its claim is limited to conduct since the introduction of the Financial Markets Conduct Act (FMCA), which came into effect from April 2014. 

Margot Gatland, the FMA’s Head of Enforcement, described the scale of IAG NZ’s fair dealing breaches as “extensive” and having impacted the insurer’s core business.

“IAG is New Zealand’s largest general insurer, including in the personal lines insurance market. Its distribution model relies on its brands and distribution partners, which reinforces the importance of the reliability of its systems,” she said.

The civil proceeding the FMA has filed against IAG NZ has eight causes of action relating to 11 alleged breaches of section 22, under Part 2 of the FMCA for false or misleading representations.

'Significant changes have been made'

In a statement on Friday, IAG NZ said it recognised that “historically it made mistakes” and the company – which reported $2.1 billion in premiums in its latest half-year result – had invested heavily in systems and processes that needed improvement. 

“Significant changes have been made and will continue to be made,” the company said.

IAG NZ Chief Executive Amanda Whiting said the insurer had been focused on refunding impacted customers since it identified the breaches.

“I apologise to our customers who were inaccurately charged or did not receive the discounts they were entitled to at the time.  The underlying issues relating to these matters have been fixed, and repayments will be completed by 30 June this year,” she said.

Whiting added that IAG’s investigations found a “significant number” of customers benefited from being undercharged by IAG during this period, but didn’t name the amount IAG had lost via under charging or say if it was more or less than the $31.1 million net gain that IAG made from overcharges.  

IAG NZ trades under the AMI, State, NZI, NAC, Lumley and Lantern brands. It also provides general insurance products sold by ASB, BNZ, Westpac and The Co-operative Bank. 

One in every two NZ households has an insurance policy with IAG NZ, which insures over $1.07 trillion of commercial and domestic assets.

Gatland said IAG NZ’s conduct in response to the FMA’s investigation should be acknowledged.  

“IAG’s self-reporting was followed by its very early admission of liability, and its full cooperation including its commitment to an undefended proceeding,” she said.  

The FMA supplied the eight pleaded causes of action below:

ASB multi policy discount issue

IAG inconsistently applied advertised multi policy discounts to customers who had purchased two or more of its ASB-branded policies.  As a result, some eligible customers were overcharged premiums. Some customers holding caravan and trailer policies were also incorrectly advised that they were eligible for the MPD when they were not.

No Claims Bonus issue

Some customers entitled to a no claims bonus did not have the discount applied as intended, leading to premium overcharges. Some AMI customers also lost their entitlement to make two at fault claims per annum without impacting their no claims bonus.

Relatedly, when changes were made to some Westpac customers’ no claims bonus status, due to a systems error they were charged higher premium amounts than they had been quoted and invoiced.

Westpac Owner Occupier Discount issue

IAG customers with Westpac-branded policies for their owner-occupier home were entitled to a discount on any Motor Vehicle, Contents and Boat policies they also held.  This was inconsistently applied.  As a result, some eligible customers did not receive the discount.

Minimum Premium issue

Certain IAG Home, Contents, Vehicle and Boat policies were subject to a minimum premium applied via IAG’s pricing algorithms, which unintentionally prevented some customers from receiving some or all of the discounts otherwise available on their policies.

BNZ/Co-Op Multi Policy Discount issue

IAG customers with BNZ and Co-Op-branded Contents policies and at least one other Home or Motor policy from the same brand were entitled to a multi policy discount.  Some eligible customers did not receive the discount, due to it being inconsistently applied. The eligibility criteria were also misrepresented on Co-Op’s website.

Multi-Dwelling issue

The number of dwellings insured on ASB and AMI Home policies determined the amount of Earthquake Commission (EC) and Fire Emergency NZ (FENZ) levies payable by the customers and impacts the premiums payable by AMI customers who added an extension to their policies. Due to errors as to the number of dwellings to be insured, some customers were overcharged EC/FENZ levies and AMI premiums.

Non-Optional Extension issue

BNZ and Co-Op-branded IAG Home policies included a non-optional extension for glass breakage. The cost of the non-optional extensions should have been included in the premium amount to which any available discounts were applied. IAG’s pricing algorithm instead treated them as optional extensions to which discounts did not apply, resulting in overcharges.

High Value and Tesla Vehicle Multi-Policy Discount issue

IAG’s representations conveyed that customers holding High Value and Tesla vehicle policies were entitled to a multi-policy discount on their premium in accordance the orthodox rules, when in fact different eligibility rules applied. Accordingly, some of those customers did not receive a multi policy discount in accordance with IAG’s representations.