ALZ.0001.0089.

0164

Allianz@
Alliani Australia Limited
ABN 21 000 000 226

Head Off!C&

30 May2018

Misconduct and Breach Reporting

Australian Securities and Investment Commission
GPOBox9827
Sydney 2001

By email: fsr.breach.reporting@asic.gov.au

Our Ref. IBR2482

Dear Sir/Madam,

RE: Allianz Australia Insurance Ltd notification of potential breach under 59120 Corporations Act; c:wercharge of
terrorism premium for commercial motorvehides

Allianz Australia Insurance Limited ABN 15 000 122 850, AFSL Number 234708 (Allianz) has become aware of
circumstances which may involve a breach of our obligations runder s12DA of the ASIC Act 2001 and which may be
reportable under s912D (1 B) of the Corporations Act, 2001 (Cth) (the Act).

1. Description of the possible breach

1.1 Summary
Certain commercial insurance products are subject to the Terrorism Insurance Act 2003. As specified in the Allianz
Commercial Motor Insurance and Allianz Business Package Insurance Product Disclosure Statements (the PDSs),
Allianz can elect to reinsure its liability under that Act with the Commonwealth reinsurer, the Australian Reinsurance
Pool Corporation (ARPC), and reflect the ARPC premium in the premium charged to its customers. The ARPC
premium does not apply to all commercial motor vehicles but can apply to vehicles that are unregistered plant and
equipment which are utilised in the mining or construction industries.

On 1 July 2016 Allianz commenced a pilot of the Allianz 'Alive' system (Alive), a web-based portal through which
Commercial Packages are arranged and which provides a central place for all Commercial Package products policy
information. This includes risk details, underwriting questions, policy schedules, policy wordings, and records of
questions and answers.

The pilot initially induded access to Alive for 12 brokers for new business only, and was subsequently followed by the
full rollout of Alive for new business to all Brokers commencing in November 2016.

On the 19 July 2017 Allianz identified that the "Alivew system user specifications did not incorporate a terrorism
question set (as was the case in previous systems) to identify whether vehicles were unregistered plant and
equipment utilised in the mining or construction industry•. As a result, since the pilot of Alive until 17 September
2017 (when a system fix was implemented), the terrorism premium was incorrectly applied to all new business
non-passenger commercial motor vehicles.

2 Malt.et Street Telephone 61 2 8258 6222

GPOBox4049 DX 10154 SSE
Sydney NSW 2001 www.alianz.com.au

CLASSIFICATION: STRICTLY CONFIDENTIAL

 ALZ.0001.0089.0165

Page2 Allianz@

1J. Relevant Laws

The obligation which may have been breached is:

• s12DA of the Australian Securities and Investments Commission Act 2001 (ASIC Act) - Misleading or deceptive
conduct

Allianz induded the following statement in the PDSs:

Terrorism Insurance Act

We have determined that this Policy (or part of it) is a Policy to which the Terrorism Insurance Act 2003
applies. We may elect to reinsure part or all of Our liability under the Act with the Commonwealth
Government reinsurer, the Australian Reinsurance Pool Corporation (ARPC).

As a consequence, We may be required to pay a premium to ARPC and that amount (together with the cost
of that part of the cover provided by Us and administrative costs associated with the legislation) is reflected in
the premium charged to You. fts with any other part of Our premium, it is subject to government taxes and
charges such as GST, Stamp Duty and where applicable, Fire Service Levy

By including in the premium charged to customers an amount in respect of ARPC reinsurance even where the
insurance provided to these customers is not covered by the Terrorism Insurance Act 2003, there is a risk that Allianz
engaged in misleading and deceptive conduct in respect of these customers in breach of section l 2DA of the ASIC Act.

2. Is this a significant breach?

2.1 The number or frequency of similar previous breaches

There have been no similar circumstances where the terrorism levy has been charged to vehicles or risk not
covered by the Terrorism Insurance Act 2003.

2.2 The impact of the breach, or likely breach. on the licensee's ability to provide pnancial services
Thisincident does not impact Allianz's broader provision of financial services.

2.3 The extent to which the breach or likely breach indicates the licensee's arrangements to ensure compliance with
those obligations is inadequate
The breach is a discrete matter and reflects an oversight in system specification finalisation and sign off, [rather
than indicating that Allianz's arrangements to ensure compliance with licence obligations is inadequate].

However, the length of time it has taken to identify, consider and remediate the incident may indicate
shortcomings in Al[ianz's compliance arrangements.

2.4 The actual or potential pnancial loss to clients, or to the licensee

A total of 1589 customers have been impacted with $238,738.82 premium (excluding GST and Stamp Duty)
overcharged. The total cost of remediation is estimated at $289,083.00 including charges. In addition, interest
amounting to $15,900will be applied by Allianz when refunding the overcharged premium.

The average refund due to each customer is approximately $300. Around 10% of the remediation group are due
refunds of $1000 or more.

Impacted customer policies comprise:

Broker and Agency division- 1,198
Direct and Financial Institutionsdivisions - 391

2.5 C,onc/usion
The total loss to customers and the time taken to rectify the incident may be considered significant.
 ALZ.0001.0089.0166
Contains confidential information

Page3 Allianz@
3. How the issue was idendfled
The missed requirement was identified during user testing forthe conversion to Alive of existing Commercial Motor
policies. The matter was identified in July 2017 and notified to management on 19 July 2017.

4. HCNI long the breach lasted

The incident commenced from the rottout of Alive on 1 July [20167}. Afix was implemented on 17 September 2017 to
prevent any further incorrect charging.
Action to refund customers has commenced. Remediation is expected to be finalised by the end of May 20_18.
5. What is the root c.ause
It appears that the requirement was overlooked during the design of specifications of the Alive system during the
review of existing systems and rules. The error resulted from the system specification not including the requirement
to distinguish whether a vehicle was unregistered and utilised in the construction and mining industry.

The error was also not detected during the Alive testing phases.

6. Remedial Action
An apology letter and refund induding interest (calculated in accordance with the FOS approach to allocating interest)
will be issued directly to impacted Direct and Financial Institution customers (391 pdicy holders).

In relation to Broker customers, the relevant brokers will be sent notices in relation to their impacted customers (1. 198
policy holders) instructing them to make the necessary arrangements to refund customers. The refunds (induding
interest) will be paid via the bfokers as in many instances Allianz will not have the customer contact details or address.

The notices will be sent by 31 May 2018.

Next Steps
Allianz will continue to engage relevant brokers to confinn refunds have been paid and will monitor return to sender
mail and non-response to emails, and follow up with Direct channel and Financial Institution customers.

If you require any further information. please contact Allianz Austrafia Head of Compliance, Jennifer Davidson on (02)
8258 5106

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onna Walker Lori Callahan
Clef Technical Officer Chief Risk Officer
Allianz Australia Limited Allianz Australia Limited

Please note: Asignificant portion of the information provided in this letter is confidential and/commercially
sensitive. We have provided this on the understanding that ASIC will not disclose it to any third party without
AJlianz's written consent