Cigna admits to wrongly lifting customers' cover and premiums

Cigna Life Insurance has admitted misleading customers and wrongly inflating their insurance cover and premiums.

The case was filed in the high court in Wellington by the Financial Markets Authority (FMA) where it was alleged that Cigna breached the fair dealing provisions of the Financial Markets Conduct (FMC) Act because of the way the life insurer communicated with customers and then charged them for inflation increases to premiums and cover to more than 52,000 policies between 2013 and 2019.

Indexation is commonly offered on insurance policies to give customers the option of having their insurance cover increased annually to keep up with inflation. This helps many customers because it ensures their cover is not reduced by inflation.

However, from early 2013 until early 2019, Cigna had not followed the law and wrongly inflated cover and premiums, the FMA said.

Some 52,363 customers were affected who paid about $13.5 million in additional premiums. Cigna has since repaid more than $10.7m – including interest – of additional premiums to customers through its remediation programme.

The FMA’s claim only applies to Cigna’s conduct from April 2014 onwards, which is the date the FMC Act came into force.

While the total additional premiums charged were $13.5m, due to the misapplication of indexation Cigna paid out about $6m in additional claims, $1.8m in third-party commissions, and assessed $1.2m in additional premium reserves. Therefore, Cigna’s net gain was about $4.5m. 

Above and beyond inflation

FMA head of enforcement Margot Gatland said Cigna had used flat rates of indexation that not only significantly exceeded the consumers price index (CPI) but were not set with reference to the CPI or the fixed rates contained in customers’ policies – as required under the relevant policies. 

The company told customers about these changes 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. Customers were required to take active steps to understand Cigna’s applied rate and verify its basis. Firms must take care to get their pricing right when applying automatic changes like these,” Gatland said.

Cigna’s communication breaches hadn’t arisen because of “systems errors” but were the result of “periodic decisions made by senior management responsible at the time,” she 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,” she said.

Cigna self-reported the issue in February 2019 and voluntarily began a remediation programme in April of that year. 

The insurer sent a letter to affected customers about the indexation issue, offering full or partial refunds and adjustments to the cover of existing customers.

But Gatland said Cigna’s remediation letters to certain customers didn’t explain that Cigna had applied indexation increases “inconsistently” with the terms of the customer’s policy and they had received more cover than they had contracted for – and therefore more cover than they may have wanted.