AIA fined $700,000 for misleading customers

AIA, New Zealand’s largest life insurer, has been fined $700,000 for making false and misleading representations to 383 customers and overcharging them a total of $413,465.

Friday, September 30th 2022, 3:30PM

by Jenni McManus

The insurer last year admitted three causes of action brought under the Financial Markets Conduct Act 2013 after the Financial Markets Authority (FMA) filed proceedings, seeking declarations from the High Court and a financial penalty. A penalty hearing took place in February.

The issues included:

passback benefits, where AIA wrongly told certain customers they were entitled to certain enhancements on an existing policy without clarifying that the benefits applied only to post-2003 policies. The information customers received in anniversary letters misrepresented the benefits and, in some cases, misled them about their policies. The passback benefits related to cover for conditions such as critical cancer, Alzheimer’s disease, intensive care treatment and heart valve replacement.
termination date issues, where AIA continued to charge premiums when customers had no cover. It also ceased cover for certain customers while their policies remained in force, resulting in some customers, whose claims had been accepted, being underpaid on those claims.
inflation adjustment, where AIA applied incorrect inflation adjustments to premiums, meaning some customers were charged excess premiums.

Margot Gatland, the FMA’s head of enforcement, says the outcome makes it clear that financial institutions will be held to account if they fail to invest sufficiently in systems, controls and processes that ensure all customers are treated fairly.

“AIA accepts that customers should be able to rely on the robustness of their insurer’s systems. AIA ‘s misconduct caused real harm by failing to correctly pay cover to a small number of sick or disabled customers,” she said.

In his decision, Justice Michael Robinson noted that AIA’s breaches were inadvertent and arose from process and systems deficiencies. AIA “responsibly” acknowledged these failures should not have occurred and should have been remedied more promptly. It had invested significantly to ensure the issues didn’t reoccur and these improvements could be taken into account when setting a starting point for the penalty.

But Robinson said there was also merit in the FMA’s submission that the insurer/customer relationship between the parties was an aggravating factor. “AIA is a major insurer. Its contravention went to the essential scope of cover and amount of premium. These are essential terms in any insurance contract,” the judge said.

In terms of penalty, there was no need for specific deterrence, Robinson said. “AIA’s breaches were inadvertent, and its remediation process was thorough [but] where breaches arise from deficient processes or systems, the penalty should deter other market participants from risking similar deficiencies.”

AIA self-reported the breaches during the FMA/Reserve Bank review of conduct and culture in the life insurance industry in 2018. But the FMA said the self-reporting was “not entirely voluntary” as AIA reported the issues only in response to direct questions. It also noted that for the termination date and CPI errors, AIA had first identified the breaches in 2011 and 2015 respectively.

Robinson said there was insufficient evidence before the court to properly assess this issue. But he agreed with AIA that regulator expectations around self-reporting had developed significantly since 2011 when the termination date issue first arose and that the RB/FMA conduct, and culture review arose from the Australian royal commission into misconduct in financial institutions.” As such, it is important to avoid hindsight when considering the timing of self-reporting in the contest of assessing pecuniary penalties.”

When it came to penalties, the FMA’s starting point ranged from $1 million to $1.2m. AIA submitted a starting point of $800,000 to $1.2m. Both parties eventually agreed on $700,000 and this was accepted by the court. The judge made four declarations against AIA for breaches of the Financial Markets Conduct Act.

Tags: FMA