FMA says the case filed in the Wellington High Court alleges that Cigna breached the Fair Dealing provisions of the Financial Markets Conduct (FMC) Act in relation to the communicating and charging of customers for inflation increases to premiums and cover.
Cigna has admitted to contravening the provisions of the FMC Act and has filed a Notice of Admissions in the High Court, the FMA said in a statement.
The FMA says the matter will proceed to a penalty hearing before the Court where the regulator will seek declarations of contravention, and the parties will submit that Cigna should be ordered to pay a pecuniary penalty.
“Cigna’s contraventions did not arise as a result of systems errors, they were the result of periodic decisions made by senior management responsible at the time,” FMA Head of Enforcement Margot Gatland said.
“This case highlights the importance of firms prioritising the fair treatment of customers, and placing customer needs and expectations at the heart of their governance and culture.”
Indexation is commonly offered on insurance policies to give customers the option of having their insurance cover – known also as sum insured – increasing annually to keep up with inflation.
It is often set using the consumer price index (CPI) and premiums and cover are increased accordingly. Indexation is beneficial to many customers because it helps to ensure their cover is not reduced by the impact of inflation.
However, Cigna used flat rates of indexation that “significantly” exceeded the CPI when it increased customers’ premiums and cover under indexation benefits on a variety of life policies from early 2013 to early 2019, the FMA says. FMA’s claim only applies to Cigna’s conduct from April 1 2014 onwards, the date the FMC Act came into force.
The regulator says Cigna did not set the indexation rates “with reference to the CPI or the fixed rates contained in customers’ policies, as was required under the relevant policies” and the changes were communicated to customers on an opt out basis through annual policy notification letters.
“The indexation increases were applied unless the customer actively contacted Cigna to seek a different level of cover,” Ms Gatland said. “Customers were required to take active steps to understand Cigna’s applied rate and verify its basis.”
Cigna self-reported the issue in February 2019, after the final report of the FMA and Reserve Bank of New Zealand life insurance conduct and culture review.
After reviewing the issue, Cigna voluntarily commenced a remediation programme in April 2019. The insurer sent a letter to affected customers about the indexation issue, offering full or partial refunds and/or adjustments to the cover of existing customers.
The FMA says Cigna has to date repaid more than $NZ10.7 million ($9.7 million), including interest, of additional premiums to customers through its remediation program.
And following consultation with FMA, Cigna has agreed to send further letters to certain customers who chose to maintain a higher level of cover, rather than a refund, to advise them of the regulator’s investigation and Cigna’s admissions.
“Cigna’s remediation letters to certain customers did not explain that Cigna had applied indexation increases inconsistently with the terms of the customer’s policy and that they had received more cover than they had contracted for, and therefore more cover than they may have wanted,” Ms Gatland said.