Overview | ASIC Report 765: When the price is not right: Making good on insurance pricing promises (REP 765)

At ASIC's direction in 2021, 11 general insurers completed reviews to '"find, fix, report and repay" for pricing failures'.  As a result of the issues identified, insurers are now set to pay an estimated $815 million in remediation to 5.6 million customers.  

The Australian Securities and Investments Commission has released a report - ASIC Report 765 When the price is not right: Making good on insurance pricing promises (REP 765) – on the outcomes of these 2021 reviews.

The report highlights:

• examples of the ongoing 'systemic failure by [general] insurers to deliver on their pricing promises' including failing to ensure that promised price discounts, benefits or loyalty promises were delivered/or were capable of being delivered in full to consumers 
• the underlying causes and ongoing nature of these issues
• ASIC's expectations around how they should be addressed and the steps already being implemented by the 11 insurers who participated in the reviews.   

Announcing the release of the report, ASIC Deputy Chair Karen Chester expressed disappointment that the issues raised in it have gone so long unaddressed, noting that insurers have been on notice of the risks of pricing misconduct and resulting consumer harm for a decade.

Ms Chester also emphasised that ASIC considers acting on these issues should now be a board priority stating: 

'It's now up to the Boards of general insurers to ensure the prompt and full repayment of the $815 million owed to their 5.6 million customers, implement the fixes needed and rebuild consumer trust.'

Below is a short overview of the key concerns identified in the report and ASIC's expectations around how these should be addressed.  

A sharper focus on 'strong product governance' is required 

The report highlights that many insurers are unable to follow through on their pricing promises as a result of product governance weaknesses.  Generally, ASIC found that 

'there was an absence of effective detective and preventative controls to identify pricing failures and stop them from reoccurring'. 

Examples of this include the following.  

No centralised record keeping

ASIC found that a number of insurers were unable to keep track of the high volume of pricing promises being made to consumers across different channels with the result that they could not readily identify what had been promised, whether it had been delivered and/or delivered in full.  ASIC also considers that lack of a centralised repository of pricing policies led to inconsistency or inaccuracy in messaging to consumers and/or inconsistency in the delivery of the discounts promised.  

ASIC's expectation is that general insurers:

'properly define a pricing promise and track all pricing promises to delivery through a centralised repository of past and present pricing promises. The repository could store eligibility details, internal approvals, and marketing materials for each pricing promise.  While promises may have been tracked through information sharing between business units, this was open to errors.  Centralised record keeping within the insurer is also necessary where pricing promises are delivered by third-party distributors.'

ASIC notes that all 11 general insurers have implemented or are in the process of implementing a centralised pricing promise repository, 'to support a more effective control environment'.

Poorly designed/administered processes

Insurers also reported deficiencies in the design of their product governance processes including: 

• lack of clearly assigned responsibilities to business units
• inadequate documentation of procedures eg procedures for approving marketing materials for a pricing promise
• lack of compliance with the processes in place/lack of evidence that processes had been complied with

The report highlights that these issues were particularly evident in the case of pricing promises administered by third party distributors.  

ASIC's expectation is that 

'Promise design should be supported by robust testing before the business process or marketing campaign is implemented, to ensure it works effectively and pricing promises can be delivered consistently'.

More specifically ASIC expects insurers to have in place:

• 'a process for assigning responsibilities to internal business units, with clearly defined reporting lines and decision makers'
• '"user acceptance testing" and post-implementation reviews'
• 'clear sign-off processes to ensure pricing changes are aligned with promises made in marketing and disclosure materials'

'Siloed decision making'

The report also points to siloed decision making and/or inadequate communication around pricing decisions as an issue.  ASIC comments that:

'Siloed decision making and inadequate communication increases the risk of pricing promises not being delivered to consumers.  A lack of coordination between business units means decisions are not fully informed and issues are less likely to be detected in a timely manner'. 

ASIC expects insurers to ensure that there is 'regular information sharing between business units and centralised record keeping to track pricing promises'.

Inadequate product and pricing reviews

ASIC also raises concerns that product and pricing reviews and incident investigations carried out by insurers prior to the 2021 reviews were not sufficiently robust/comprehensive to detect ongoing pricing issues.  For example, ASIC observes that prior reviews of product disclosure statements by insurers did not always identify references to discounts that the insurer never intended to provide.  

Weaknesses in ongoing monitoring and oversight 

ASIC found that:

'To varying degrees across different general insurers, there was an absence of effective detective and preventative controls to identify pricing failures and stop them from reoccurring'.

In particular, the report points to a lack of adequate oversight/monitoring of promises made by third party distributors. 

ASIC comments: 

'Third-party distributors sometimes had a high degree of control over pricing promises. Some had discretion to make decisions and approve prices and promotional offers.  During the reviews, some insurers relied on third-party distributors to verify the delivery of pricing promises, investigate findings and remediate consumers. We also noted breakdowns in data sharing between insurers and third-party distributors'.

Strong product governance is key

Ultimately, ASIC considers that a lack of focus on ensuring effective product governance and lack of effective monitoring and oversight has led to significant delays in identifying/addressing longstanding product pricing issues and has resulted in considerable (and ultimately avoidable) cost.  ASIC comments:

'The significant amount of time taken for general insurers to identify pricing failures, and to investigate and identify the "root cause" of the failure, highlights significant concerns with the insurers’ ability to manage their non-financial risks.

If general insurers had identified the pricing failures much earlier, and investigated and identified the root cause in a thorough and timely manner, ASIC’s intervention may not have been required and consumer harm and remediation costs would not have exceeded $815 million and extended to millions of consumers'.

ASIC's expectation is that 

'insurers should take a proactive approach to risk, including thoroughly investigating reportable situations to identify the ‘root cause’ and other areas of concern highlighted across the industry'.

Design and delivery of pricing promises 

In addition to these issues broader issues, the report also identifies flawed product design and delivery as a key barrier to insurers being able to follow through on their pricing promises.  Examples of this include that insurers:

• 'offer many different pricing promises with little consistency across the design of the promises'
• 'use complex pricing practices with greater potential for error' including (among other issues) the 'misapplication' of pricing floors'
• 'do not use existing data to identify eligible consumers' 
• 'rely on systems requiring manual overrides by staff to fulfill promises' (due to system and data limitations)

Of these issues, ASIC highlights 'misapplication' of pricing flaws as relatively widespread.  According to the report, six of the 11 general insurers identified misapplication of price floors as an issue within their business.  Remediation connected with the issue is estimated at more than $379 million (or close to half of the overall total amount expected to be paid by insurers in connection with pricing failures).  

(Mis)application of pricing floors

The report identifies two issues with the way in which (some) insurers applied pricing floors: 

• insurers did not disclose to consumers that a discount could be limited by the imposition of a price floor; and 
• pricing algorithms (in some cases) were structured so that promised discounts were applied before the price floor was applied with the result that once the price floor was 'triggered', the consumer did not (always) receive the full discount promised.  

ASIC underlines that 

'the use of opaque disclaimers such as "minimum premiums may apply", which are often hidden at the bottom of a web page or in a lengthy PDS, does not solve these issues'. 

ASIC's expectation is that general insurers should:

• 'regularly examine their promotional material and disclosure documents to ensure that the disclosure on price floors is clearly understood by consumers and that any representations made are consistent with how the consumer’s premium is calculated'. 
• 'consider how disclosure of the existence of price floors can influence consumers’ behaviour, and improve transparency and engagement accordingly'. 
• 'regularly review their pricing algorithms to ensure that they are operating as expected and not contravening the law'.  That is, ASIC's expectation is that pricing algorithms are structured so that the promised discount is applied after the price floor has been applied (not before this has occurred)

In making these points, the report emphasises the role of stronger product governance in guarding against these issues noting that: 

'These are relatively straightforward risks that general insurers should have been able to identify through good product governance'.  

Loyalty discounts

ASIC observes that loyalty discounts are a 'key component of profitability for most lines of personal insurance' because they may operate to discourage consumers from switching providers.  This is because these discounts: 

• 'tend to offer more generous benefits the longer the consumer stays with the insurer
• typically are not transferrable to another insurer, and
• capitalise on existing inertia for consumers to stay with their existing insurer rather than shop around'. 

However, the report flags that the promises made to consumers are not always 'objectively true' or being applied in the way consumers are entitled (from insurers' communication) to expect.  For example:

• loyalty discount promises are sometimes affected by other issues highlighted in the report including the application of pricing floors (that are not disclosed to consumers)
• 'some general insurers may be making positive representations about rewarding loyal consumers (eg for years of tenure) that could be inconsistent with how the pricing engine is calculating the premium for the consumer'.  For example, by applying (unknown to the consumer) a 'loyalty tax'.  

ASIC also raises concerns that: 

'as insurers develop their use of price optimisation and big data to set premiums for consumers, there is a need to consider whether these techniques may be incompatible with loyalty promises.  For example, insurers may make a promise to reward loyal consumers but at the same time use big data to identify price inelastic consumers and allocate larger price increases to those consumers.  This would not meet community expectations as consumers who are more "loyal" or do not shop around may receive larger price increases that are inconsistent with the loyalty promise'.

ASIC's expectation is that insurers:

'ensure representations made in renewal communications are not false or misleading.  Consumers should not be promised they are being rewarded for loyalty unless this is objectively true.  General insurers must ensure any statement or representation that offers consumers a competitive price is not false or misleading'.

'In kind promises'

The report highlights that

'all the risks and findings that applied to traditional pricing promises also applied to in-kind promises, particularly those involving third-party distributors'. 

ASIC emphasises that:

'In-kind promises must be treated like any other kind of pricing promise—as one that must be capable of full, complete and verifiable delivery to consumers as promised'.  

Deficiencies in systems, processes and data 

The report makes clear that the issues highlighted have been exacerbated by a lack of adequate systems and processes, including poor data management.  

ASIC considers lifting standards necessarily requires addressing these deficiencies.  ASIC comments:

'These problems primarily involved system and data limitations, poor data practices, and inadequate tools for insurers to calculate prices and premiums.  General insurers have been challenged by both ASIC and APRA to invest more in systems (including IT systems), processes and data for a number of years as part of uplifting their risk management practices.  ASIC considers that a lack of data and other forms of management information, together with the consolidation of brands in the industry across multiple legacy systems, have contributed to the scale and longevity of the issues that were uncovered in the reviews'.

Continued monitoring of the 'fixes' required

• The insurers who participated in the reviews have undertaken to implement various actions to address the issues identified in the report.  
• ASIC also required each of the 11 insurers to allocate oversight of their pricing review to a senior executive and for that executive to provide ASIC with written confirmation that they considered the review had been completed 'in a satisfactory manner'.   ASIC expects these executives to continue their oversight of the remaining program of work until completion.  They are also required to provide a further attestation to confirm to ASIC that 'the fix, repay and report phases have been satisfactorily completed'. 
• ASIC further expects the boards of general insurers to satisfy themselves that each phase is completed satisfactorily.  
• More broadly, ASIC expects insurers to adopt a 'proactive approach' to managing nonfinancial risk including

'responding…in real time' where issues are identified at peer organisations to ensure similar issues are not occurring their own business.  

Pricing promises are an enforcement priority for ASIC 

Addressing failure by general insurers to deliver on their pricing promises is one of ASIC's enforcement priorities for 2023.  

In line with this, ASIC has already commenced civil penalty proceedings against two insurers and cautions that it has 'further investigations underway'.  

Since the report was released the Federal Court has handed down a $40 million penalty over (historical) failure by an insurer to honour discount promises.  

Reminder that nonfinancial risk cannot be allowed to slip down the priority list 

The message for boards in REP 765 is not new.  As ASIC stated in 2019:

'non-financial risks have very real financial implications for companies, their investors and their customers…Boards cannot afford to ignore the oversight of non-financial risks.  We have seen first-hand the damage that can result when it is not made a priority…Boards must recognise that they are accountable for mitigating all risks - financial and non-financial - facing a company'.
…The board should ensure processes and practices are implemented so that the organisation operates within the board’s strategic goals and stated risk appetite. Officers should give their boards all information they have that is material to the board’s decision making.  Equally, the board needs to ensure it is receiving adequate information to make informed decisions.'

Rather, REP 765 underlines the need for continued and sharper board focus on management of nonfinancial risk, the more so in light of the regulatory spotlight on other 'product governance' issues including DDO compliance and greenwashing.  

From a practical perspective, we suggest that boards ensure that a review is undertaken to find, fix and remediate any pricing failures in their businesses, and having regard to the following questions.  

• do we have a clear picture of the pricing promises we have made?
• what would our customers understand our pricing promises to mean?
• are our pricing promises being met?  Do we have the full picture?  If not, why not?  
• how are our product governance processes designed, documented and administered? 
• how is compliance with our product governance processes overseen, monitored and enforced? 
• how effective are our product governance processes at ensuring our pricing promises are met or identifying any deficiencies?  How quickly are any deficiencies identified, escalated and resolved?
• what third party arrangements are relevant and how are they monitored and compliance ensured?
• who is accountable within the business?
• what information does the board receive about this risk in our business and how it is being managed?  What information should the board receive?
• does our approach to making and meeting pricing promises align with our broader risk framework? 

[Sources: ASIC media release 23/06/2023; ASIC Report 765 When the price is not right: Making good on insurance pricing promises]