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Why Freedom Insurance Group Ltd (ASX:FIG) shares sank over 26% lower today

It certainly has been a day to forget for shareholders of Freedom Insurance Group Ltd (ASX: FIG).

The insurance company’s shares fell as much as 26.5% to an all-time low of 25 cents at one stage. As we approach the market close its shares are 23.5% lower at 26 cents.

Why were Freedom Insurance’s shares smashed today?

This morning the Australian Securities and Investment Commission (ASIC) released a report in relation to direct life insurance sales in Australia.

According to the report, ASIC’s review of direct life insurance sales found that sales practices and product design are leading to poor consumer outcomes.

Its investigation found that consumers are cancelling their policies in very high numbers. In fact, one in five policies taken out were cancelled within the cooling off period. After which, one in four of all policies that remained in force beyond the cooling off period were then cancelled within 12 months. And within three years three in five of all policies sold were cancelled.

The report also found that life insurance sold directly compares poorly with other channels when it comes to claims. ASIC reported that 15% of claims are declined and 27% of claims are withdrawn.

ASIC Chair James Shipton stated that: “Life insurance is a long-term product but cancellation rates and poor claim outcomes show that people are being sold products they don’t want, can’t afford, or don’t perform as they expected.”

Given that the report found that four firms engaged in pressure selling techniques, including refusing to send out paperwork unless a consumer committed to buy, I can’t say I’m surprised by the cancellation rates.

ASIC’s review covered 11 firms including Commonwealth Bank of Australia (ASX: CBA) subsidiary CommInsure, Australia and New Zealand Banking Group (ASX: ANZ) subsidiary OnePath Life, and Suncorp Group Ltd (ASX: SUN) subsidiary Suncorp Life & Superannuation.

Freedom Insurance wasn’t part of the report but is one of the biggest direct sellers of insurance products in Australia. In response to the report, it stated that: “Freedom will consider ASIC’s report in detail and evaluate any actions the company may take to ensure that its sales practices and product design continue to meet the expectations of its customers and the regulator.”

Should you buy the dip?

While its shares do look dirt cheap at these levels, I intend to keep my powder dry for now. Especially given that when the Royal Commission resumes on September 10 it will be grilling insurers on questionable selling techniques.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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