IAG shares caught in a storm as millions join 'loyalty' lawsuit

Allegations levelled at this insurance giant could lead to a costly exercise.

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Clouds have gathered around the shares of Insurance Australia Group Ltd (ASX: IAG) today. As if sticky inflation figures weren't troublesome enough, the insurance giant is also coming to grips with a new class-action lawsuit backed by millions of people.

As the day winds down, shares in the $15 billion insurer are skating 2.5% lower to $6.25. The uninspiring performance makes IAG the worst performer in the financial sector, outpacing losses across the big four banks.

Allegations of exploited loyalty

Following an investigation, the law firm Slater and Gordon served IAG with a class action claim in the Supreme Court of Victoria yesterday.

The firm will represent millions of policyholders who held insurance policies from RACV, SGIO, and SGIC — the last two of which are now encompassed under the NRMA brand — between 2018 and 2024. All three insurance companies are subsidiaries of IAG.

At the core of the claim is the allegation that IAG used an algorithm to determine policy pricing based on loyalty. Rather than being rewarded for their proclivity to stay, customers may have been charged a higher premium — departing from the 'loyalty discounts' sold to customers, the claim alleges.

Explaining further, Slater and Gordon's Ben Hardwick said:

The higher the computer program identified a customer's perceived price elasticity, the lower the annual premium increases the customer would receive, so loyal customers who were assessed as having low price elasticity and were unlikely to leave, faced steeper increases to their premiums.

In an interview with ABC News, Hardwick noted many affected customers could be entitled to more than $1,000 in compensation.

IAG addressed the claim in a release made last night. In the announcement, the insurance provider acknowledged Slater and Gordon's claim before dismissing it.

As IAG announced on 25 August 2023, IAL [Insurance Australia Limited] and IMA [Insurance Manufacturers of Australia Pty Limited] are defending the ASIC proceedings. IAL and IMA maintain they have delivered on loyalty promises made to customers and do not agree that they have misled customers about the extent of the discounts they would receive.

IAG shares retreat from record zone

The possible implications of the lawsuit have dampened the mood around the IAG share price.

Before today, the value of the insurers' shares was riding high at a closing price of $6.41. Another 2% rise and the company's share price would have reached its highest point since before the COVID crash in 2020.

Nevertheless, IAG shares are still faring well when we step back. Up 19.8% compared to a year ago, IAG shareholders are doing better than many others over this timeframe. Although, the performance is only slightly better than the 17.5% return across the financials sector.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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