An insurer that imposed a much higher premium on a customer’s property policy has discovered that the new Australian Financial Complaints Authority (AFCA) can rule if the increase is fair.

Under AFCA’s rules, insurers have the right to assess and set premiums, but they must also demonstrate the process has been conducted “fairly and consistently” to justify the rates policyholders are charged.

The disputes body issued the warning after it ruled against the insurer in a case submitted by a customer who did not agree with a 39% increase in home and contents premiums over the previous year.

The insurer explained that additional flood data that had become available was included in the risk assessment of the property,

But the renewal notice, which included a comparison of the previous year’s premiums, did not explain how the insurer calculated the new premiums.

“The insurer submitted that the complaint concerned the level of a fee, premium or charge and as such was outside AFCA’s jurisdiction,” the disputes body says in a newsletter released today.

“The insurer stated that they had sent the customer an offer of renewal and it was their choice to accept or reject it. AFCA can, however, consider complaints that concern the incorrect application of a premium.

“As this complaint concerned the method by which the insurer set the premium and not the process of renewal, we accepted it as being within [our] jurisdiction.”

AFCA ruled that the flood premium increase flagged in the policy renewal must be cut by 50% after the insurer did not give sufficient details to determine whether the new modelling was fair and whether the hike was justified.

On the other hand, the customer provided AFCA with a recent government report that suggest their house and land had an extremely low flood risk.

“In response, the insurer advised that the study was not available to the industry,” AFCA says. “They did not explain, however, why it was not sourced, given local and government studies are considered by the insurer to provide the most reliable flood hazard maps.

“As a result, we found in favour of the complainant and determined the insurer had not exercised its discretion fairly when setting the premium.”

General insurance makes up 22% of the 23,681 complaints AFCA has received since it took over in November from the Financial Ombudsman Service as the financial services dispute resolution body.