The FMA said the case was based on "three core breaches" over incorrect and misleading communication to customers holding life insurance and associated policies.
The breaches were: a purported enhancement of policy benefits, charging premiums after the termination of a policy and treating policies as terminated when they should have remained in force, and incorrect inflation adjustments.
"AIA wrongly told certain customers they were entitled to passback benefits (cover enhancements to an existing policy), without clarifying that the benefits only applied to post-2003 policies," the FMA said in its statement.
"The information customers received in anniversary letters misrepresented the benefits, and in some cases misled them about their policies."
The regulator added AIA also continued to charge premiums when customers had no cover. Letters were sent to certain customers with policies approaching the end of their duration, specifying when cover would cease, but the letters contained the incorrect date.
AIA further wrongly ceased cover for certain customers, the FMA said, while their policies remained in force. This resulted in some customers, whose claims had been accepted, being underpaid on claims. Customers were informed by cover cessation letters.
The FMA said when AIA applied incorrect inflation adjustments to premiums, many customers choose to have their sum-assured adjusted in line with inflation, with premiums increased accordingly. This saw some customers charged excess premiums.
The seriousness of the breaches and the length of time it had taken to deal with affected customers warranted enforcement action, the FMA said.
Karen Chang, the FMA's head of enforcement, said consumers' trust in the integrity of their life insurance provider was paramount for the industry to be effective.
"This case demonstrates that firms providing critical insurance must ensure they have necessary systems and controls in place to perform their core business and manage their customers' policies correctly," Chang said.
"The customers affected by the passback benefits issue will have undergone a traumatic and life-changing event before making a claim. AIA's behaviour exacerbated and prolonged the harm to customers who were already in vulnerable circumstances."
Chang said customers took out insurance to reduce stress and financial impact at a time of significant hardship and uncertainty, but when they needed the cover they had been told they had, it was denied.
"Moreover, AIA would not pay out until much later," she said.
Stanhope said after conducting an internal review, AIA found what he described as "a small number of instances" where the company "may have fallen short of our own standards and commitment to being as transparent as possible with our customers".
"Since self-disclosing these issues to the FMA, we have worked relentlessly to remediate these complex issues, whilst engaging and cooperating with the FMA throughout," he said.
The remediation process, Stanhope explained, was complete and if a customer was affected they would have already been contacted by AIA to "put the issue right".
"As part of this remediation, we have also reviewed our systems and processes to ensure this does not happen again. We always strive to do the right thing by our customers and community, and this situation is no different," he added.
The FMA said it would be seeking confirmation remediation for affected customers had been completed.
Stanhope said AIA "worked swiftly" with the FMA to come to a resolution.
The FMA's case only captures breaches which occurred from April 2014 – when the FMC Act came into force – but some breaches it said occurred prior to this and continued after the legislation came into effect.
