IAG’s staff sounded the alarm internally about a discounting algorithm six years before the board was appraised of the premium pricing challenges which have since cost the insurance giant over $500 million, according to a report from The Australian Financial Review.
In an email seen by the publication, one technology worker raised concerns about IAG’s discounting approach, stating that it, “seems inconsistent with our customer-focused strategy.”
The flaw, which saw customers short-changed due to an undisclosed floor-pricing mechanism, cost IAG the sector’s biggest-ever fine after a $40 million penalty ruling last week.
Financial Review revealed that a director in IAG’s New Zealand subsidiary has stepped down from the board amid the ongoing fallout. IAG’s former head of personal insurance resigned over the weekend, having been in the executive role when the “cupping” floor-price algorithm was introduced. IAG confirmed that the director had stepped down “following the Federal Court judgment”.
The report noted that IAG had maintained in court that there was no evidence that senior managers were aware of any failure to disclose the impact on discounts to customers. However, Justice Wendy Abraham said this “submission ignores that the senior staff that were involved in implementing the cupping mechanism ought to have known what was occurring”.
The initial missed discounts impacted almost 611,000 customers purchasing NRMA cover for homes, cars, boats and caravans. The federal court case centred on IAG’s failure to disclose that an algorithm had changed advertised discounts.
Financial Review’s report stated that, in 2013, one technology worker emailed their superior saying the floor limiting option did not discuss the “market perception associated with offering a particular discount level and then adjusting the base premium to reduce the effective discount”.
In the email, the worker asked, “would anyone have any objections … asking for it to be made clearer to the exec”?
According to the report, in October 2015 – after ASIC warned about disclosures and no-claims discounts – an IAG underwriting committee briefing pack discussed the issue. It revealed that a statement of agreed facts said that while a “working group was established to investigate NRMA’s no claims bonus discount, no changes were made”.
The publication noted that IAG was unable to answer multiple internal questions over the years concerning what had occurred, only for an external consultant to raise the issue in 2019 - triggering an internal investigation. After the board was notified, IAG filed a breach notice to the Australian Securities and Investments Commission. This was followed by nine more breach notices about other pricing issues, as revealed by the Financial Review - with gross costs surpassing $500 million.
An IAG spokesman told the Financial Review that since identifying the problem, the insurer had been providing refunds and strengthening its risk management systems to “help prevent these issues happening again”. He noted that more than $100 million had been spent on upgrading capabilities.
Financial Review highlighted that among the changes is that any potential risk registered by employees must be assessed within five days, and possibly escalated until matters are dealt with.
