One of Australia’s biggest insurers failed to pass $60 million worth of discounts to customers thanks to a set of computer algorithms that had been left untouched for five years, the corporate regulator has alleged.

The Australian Securities and Investment Commission (ASIC) launched Federal Court proceedings against Insurance Australia Limited (IAL) on Friday for what it calls “misleading or deceptive conduct” that saw the insurer promise, but never deliver, on discounts for customers.

“All insurers should take urgent steps to ensure they can and do meet the pricing promises they make,” ASIC Deputy Chair Sarah Court said.

“This may require insurers to update legacy IT systems and make improvements across compliance, governance and culture.”

ASIC’s claims IAL offered a set of discounts to customers under 13 NRMA-branded insurance products but used an automated system to effectively offset the discounts, ensuring they were never applied.

That automated system included what the corporate regulator described as a ‘capping mechanism’ which was triggered if discounted premiums were higher than a certain threshold compared to the previous year.

When triggered, the process would re-calculate a customer’s premiums – adding back the discounts that had been deducted – before re-applying the discounts to this new ‘grossed up’ premium.

The result of this automated system was that customers ended up seeing the discounts except they were being applied to a higher gross premium than they would have otherwise been offered.

Nearly 600,000 IAL customers were affected by the algorithmic premium hikes, resulting in an estimated $60 million in discounts not being handed to consumers.

IAL self-reported the issue to ASIC in September 2019, removing the automated capping mechanism and has been gradually paying customers back.

ASIC is also seeking civil penalties against IAL.

IAL’s parent company, the ASX-listed Insurance Australia Group Ltd (IAG), published a statement to shareholders last week, saying it had provisioned funds to pay back customers – but had not done so for “any potential civil penalty outcome”.

“Considerable progress has been made on the remediation program with more than 80 per cent of affected NRMA Insurance customers having now been compensated in relation to this issue,” the statement said.

“IAG apologises for this failure, recognises the significance and that this was unacceptable, and is putting this right for its customers as soon as possible.”

Since 2018, the company has been paying back $377 million worth of unpaid discounts to customers across its brands including NRMA, SGIC, and Coles Insurance.