Cigna fined $3.575 million for unauthorised premium hikes on more than 52,000 life insurance policies

Tuesday, 17 January 2023

Insurer Cigna has been fined $3.575 million at the High Court in Wellington for misleading, and overcharging, more than 52,000 of its life insurance policyholders.

The insurer, which earns around $300m in premiums each year, did this by increasing the amount of life insurance cover the policyholders had by more than the rate of inflation, despite its policies not authorising it to do so.

Many of Cigna’s life insurance policies contain “indexation” clauses allowing the insurer to increase policyholders’ cover each year so claims values keep pace with inflation.

Lifting cover by more than the rate of inflation, meant the insurer charged higher premiums, and earned larger profits, said High Court justice Jillian Mallon in a judgement dated December 22.

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The practice was deliberate with senior management discussing, and agreeing to it in late 2012, Mallon found.

The average amount of extra premiums the 52,363 policyholders paid was $258 over six years, but some paid much more, with one paying a $33,370 extra over that time.

In all, customers paid $13,522,690 in additional premiums, Mallon said, which resulted in a gain of $4.556m after costs for the insurer.

The maximum possible fine the insurer faced was $100m, Mallon said.

But she opted to fine the insurer $3.575m, which she said sent a message of deterrence to other insurers.

It’s the second time in a year that Cigna has been found to have misled customers.

In June last year, Cigna agreed to pay $180,000 to the Financial Markets Authority (FMA) Te Mana Tātai Hokohoko for their part in a credit card misselling scandal which landed ANZ in court.

In her judgement, Mallon said that between March 2013 and March 2019, Cigna raised cover levels on some accidental death policies by 10% each year.

And between March 2013 and September 2015, it raised cover annually by 5% on some other policies.

Senior management approved the inflated annual increases in late 2012, after they realised the annual increase on policies had been reduced in October of that year from 5.3% to 2.5% for many policies.

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In September 2012, the Consumer Price Index (CPI) was around 1%

The minimum indexation increase allowed in Cigna’s policy wordings varied from 2% to 2.5%, Mallon found.

“Cigna’s senior management discussed this change in late December 2012,” Mallon said.

“They discussed that there had been no sign-off for this change and no consideration had been given to the impact it would have for revenues and sales.”

While Cigna’s senior management's decision meant more cover for policyholders, Mallon said it was not for Cigna to decide this for customers without being clear and transparent about the basis for the increase.

Cigna internally reviewed the practice in 2014 and 2015, Mallon said.

The 2015 review arose after an actuary raised a warning with the insurer.

It was only after a further review in 2018 that Cigna dropped the indexation rate for affected policies to 2%, the published CPI rate at the time.

But Mallon said, it only reported the issue to the FMA in early 2019, after the regulator launched a review into the behaviour of life insurers.

Mallon said Cigna acknowledged it had made false and misleading statements in its communications with policyholders.

In a statement after Mallon’s judgement was published, the insurer said: “In 2019, a Cigna New Zealand internal company review identified issues related to the wording of indexation clauses in some of its life insurance policies.”

It reported the issues to the FMA, cooperated with its investigation, and started the remediation, it said.

By August last year, Cigna had repaid $10.8m, including interest, to policyholders.

But, a Cigna spokesperson said: “More than three in four customers contacted by the company have chosen to keep their indexed cover.”