Insurance giant IAG’s staff raised doubts internally about a discounting algorithm six years before the board heard of the problems that the business was having in pricing premiums, which have since cost it more than $500 million, according to a story in the Australian Financial Review.
“This seems inconsistent with our customer-focused strategy,” one technology worker wrote in an email about IAG’s approach to reducing a customer’s “effective discount”.
The flaw, which short-changed customers for years because of an undisclosed floor-pricing mechanism, also cost IAG the sector’s biggest-ever fine following a $40 million penalty ruling last week.
IAG’s former head of personal insurance, Andy Cornish, resigned from that board over the weekend. Cornish had been in the executive role when the “cupping” floor-price algorithm was introduced, and although he had since left that position, he had been a director of IAG’s subsidiary.
IAG had maintained in court that there was no evidence that senior managers knew of any failure to disclose the impact on discounts to customers, but 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”.
These initial missed discounts affected almost 611,000 customers purchasing NRMA cover for homes, cars, boats and caravans. The case centred on IAG’s failure to disclose that an algorithm had changed advertised discounts.
It effectively meant that when a premium fell by more than the algorithm allowed, customers’ base premiums were “recalculated and increased” so discounts would fall within required ranges. A previous system had applied discounts after any floor and ceiling adjustments.
The new system was introduced as part of simplifying the processes within IAG.
A personal insurance executive change committee, which included the then personal insurance chief, approved the funding in 2013 to introduce an automated solution for ceiling and floor price change.
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”.
More than $100 million had been spent on upgrading capabilities, he said.