IAG will fight legal action launched by the Australian Securities and Investments Commission (ASIC) over allegations that it misled customers about loyalty discounts on certain types of home insurance.

The ASIC civil proceedings filed in the Federal Court relate 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.

“We allege that IAG subsidiaries, IAL and IMA, misled their customers about the extent of the discounts they would receive,” ASIC Deputy Chair Sarah Court said today.

“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.”

IAG issued a statement today acknowledging the ASIC action and saying that it would 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 lodged 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 premiums, based on factors considered to be the most statistically significant, as part of the process for determining the initial premium.

“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 alleges that between August 25 2017 and yesterday IAG’s pricing algorithm operated inconsistently with its discount promises and therefore the insurer “failed to operate efficiently, honestly and fairly”.

Loyalty benefits offered related to the length of time that a customer had held an eligible product as well as multi-policy discounts.

“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.”

ASIC is seeking Federal Court declarations of contravention, pecuniary penalties and adverse publicity orders against IAL and IMA. The date for the first case management hearing is yet to be scheduled.

Separately, IAG was penalised $40 million in the Federal Court in June for failing to honour discount promises made to customers who held NRMA branded motor, home, boat and caravan policies.

That matter related to the use of a “cupping mechanism” that ensured premiums did not fall below a certain price point.

ASIC has also launched proceedings against RACQ Insurance for allegedly misleading statements regarding pricing promises and in a report on the industry in June said it had commenced other investigations into insurers involving suspected failures to deliver on discounts.

General insurers are remediating over $815 million to more than 5.6 million consumers for pricing failures reported to ASIC since 1 January 2018.