Insurance industry investors were warned last week to brace for a Royal Commission bashing and it has not disappointed with a series of shocking revelations putting the sector under pressure.
The likes of QBE Insurance Group Ltd (ASX: QBE), Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN) have all moved lower over the past five trading days.
However, their moderate falls are nothing in comparison to those experienced by junior general and funeral insurance provider Freedom Insurance Group Ltd (ASX: FIG).
Its shares are down around 80% over just the past year and down 20% today as its executives are questioned at the Royal Commission over its dodgy business practices.
According to reports in both the Fairfax and News Corp (ASX: NWS) media, Freedom is accused of deliberately obfuscating client orders to cancel policies, and even financially incentivising sales staff who did not cancel customers' policies.
According to the reports only around a quarter of customers who originally called to cancel policies actually met that goal.
The insurance sector has long suffered from boiler room cold calling operators with dubious business practices at best and after recent revelations it's no surprise investors have sent Freedom to join AMP Limited (ASX: AMP) in the dog house.
Worse news for Freedom's remaining shareholders is that ASIC has called into question its conflicted remuneration business model, whereby advisors are paid upfront commissions for selling funeral insurance policies for example.
Incentivising staff with conflicted remuneration on different financial products has long been the modus operandi of many boiler room financial services operations in Australia as its regulatory environment is weaker than other developed nations.
The Future of Financial Advice (FOFA) reforms on permissible conflicted remuneration were even watered down several years ago in order to accommodate the boiler room end of the financial services industry after it lobbied politicians with success to the detriment of consumers.
It's not just the smaller insurers in trouble with the Royal Commission.
Players like CommInsure as the insurance arm of the Commonwealth Bank of Australia (ASX: CBA) are also under fire for its treatment of claims and misleading the financial ombudsman.
From an investor's point of view it's clear the life insurance sector has been under pressure for at least the past 5 years.
This is largely as consumers wise up to the fact that a lot of it is a waste of money or too expensive, as for example where regular life insurance fees are tacked onto superannuation accounts often with the superannuant unaware of their existence.
