More than 150,000 households are facing premium increases after New Zealand's biggest insurer revealed it has been miscalculating coverage for more than 30 years.
IAG, owner of brands including State and NZI, discovered last year it had a problem with tens of thousands of house and contents insurance policies in which coverage was meant to rise in line with inflation.
In fact, the coverage on 150,755 policies dating back to 1980 had either not increased or had increased at below the rate of inflation.
It told the Commerce Commission of the problem soon after it was discovered, and said yesterday that it was likely to cost it up to $3.48 million.
"It was a case of saying one thing to our customers ... and then not making our systems do that," IAG general counsel Martin Hunter said.
The cost relates to 643 claims where customers had received payouts to the maximum of their policy coverage, but where the maximum should have been higher.
The problem emerged after the Christchurch earthquakes, when many customers faced major losses to property.
Mr Hunter said premiums on the affected policies had not been keeping up with inflation as intended, so customers had not been overcharged, but their coverage had not been increased as promised.
The discovery would lead to premium increases for those policy holders who wanted to maintain the level of coverage they were previously entitled to.
He refused to comment on how much premiums would rise, saying it depended on the type of policy and the time the customer had held it.
Earlier this year IAG bought AMI, the insurance co-operative that failed after the earthquakes. However, no AMI policy-holders are affected by the issue.
Some policies sold through the Bank of New Zealand, ASB and the Co-operative Bank are affected.
IAG head of corporate affairs Craig Dowling admitted calculating coverage was core insurance business, but denied the failure exposed a flaw in its systems.
"This is not a gross systemic error that demonstrates our business is really broken – not at all. It's just an administration error that, frankly, doesn't do our brand much good and we're feeling pretty apologetic about it."
The Commerce Commission issued a statement saying a "costly error" had resulted in a settlement with IAG.
However, despite each of the policies breaching the Fair Trading Act, the insurer was handed no fine. General manager of competition Kate Morrison said the settlement reflected the fact that IAG had quickly informed the commission of the problem and taken steps to rectify it.
About 150,000 customers will receive letters during their annual renewal cycle adjusting their policy and premium to the corrected levels.
- The Dominion Post