FMA lands its biggest ever penalty

Cigna Life Insurance has been ordered to pay $3.57 million for making false and/or misleading representations relating to inflation benefits in certain life insurance policies provided by the company.

Tuesday, January 17th 2023, 10:58AM

by Kerry Meadows-Bonner

In August, Cigna admitted to breaching the Fair Dealing provisions of the Financial Markets Conduct Act, following proceedings brought by the Financial Markets Authority.

The case relates to Cigna’s communication of, and charging for, inflation benefits (known as “indexation”) to customers holding 52,363 policies between 1 April 2014 (when the FMC Act came into force) and early 2019.

From early 2013 until early 2019, Cigna increased customers’ premiums and cover under indexation benefits, on a variety of life insurance policies, using flat rates of indexation that significantly exceeded the CPI which were not set with reference to the CPI or the fixed rates contained in customers’ policies, as was required under the relevant policies. The company communicated these changes to customers on an opt out basis, through annual policy notification letters.

Cigna charged around $13.5 million in additional premiums for the increased cover that it provided. However, its “net gain” was around $4.5 million because it paid out around $6 million in additional claims relating to the additional premiums, $1.8 million in third-party commissions, and assessed $1.15 million in additional premium reserves. Cigna says that its net gain will continue to reduce as future claims are paid out.

Justice Mallon says “Cigna acknowledges that providers of financial services, including insurers, have a special relationship of trust with their customers. It also acknowledges that customers are entitled to trust that Cigna will be clear and transparent in its communications with its customers.

“While customers obtained increased cover from Cigna’s conduct, it is not for Cigna to decide this for customers without being clear and transparent about the basis for the increase. Cigna’s conduct was not the result of a systems error. It was the result of decisions made by senior management.”

FMA Head of Enforcement, Margot Gatland says “The $3.5 million penalty against Cigna is the largest the FMA has secured in an enforcement case, which reflects the level of harm caused by this issue. Cigna’s conduct affected many of its customers, who trusted the firm to be transparent and look after their interests. This judgment sends a strong message to the industry that firms need to give due regard to customers’ interests, including when making pricing changes and communicating them.

Justice Mallon agreed that a penalty of $5.5 million was an appropriate starting point. The Judge applied a 35% discount - arriving at $3,575,000 - due to Cigna self-reporting the issue, cooperating with the FMA, agreeing to admit to contraventions and settle, adopting process improvements, and undertaking a substantial remediation programme.

Background to the case

Cigna self-reported the issue in February 2019, after the final report of the FMA and Reserve Bank of New Zealand (RBNZ) 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.

As of the date of this media release, Cigna has repaid over $10.7 million (including interest) of additional premiums to customers through its remediation programme.

Following consultation with the FMA, Cigna 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 FMA’s investigation and Cigna’s admissions. Those customers will be prompted to ensure their level of cover is adequate for their needs and that they should contact Cigna if they have any questions.

Tags: Cigna