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Why insurance stocks like Insurance Australia Group Ltd (ASX:IAG) could fall next week

The share prices of our local insurers are likely to drag our market lower next week as the Banking Royal Commission starts calling them to account for alleged unethical behaviour.

The market is already under pressure with the with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shedding $57 billion over the last week alone.

Shareholders should be worried as the Royal Commission has proven to be very effective in finding the skeletons in the closet – and you only need to look at the sharp de-rating in the share prices of AMP Limited (ASX: AMP) and the big banks like Commonwealth Bank of Australia (ASX: CBA) to see evidence of this.

There could be more pain ahead for these two financial giants as they will be called to front the Royal Commission again when it sits on Monday.

It is alleged that their customers have to wait for more than 12-months to get their insurance claims processed in the hope that claimants will get frustrated and give up, according to a report in the Australian Financial Review.

AMP will likely be harder hit as Commbank had sold its CommInsure business to Hong Kong-based AIA for $3.8 billion last year.

This won’t get Australia’s largest bank off the hook but at least it won’t have to worry about reforming its insurance practice, unlike AMP.

Other large insurers like Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG) could also suffer some blowback if the Royal Commission uncovers more shocking practices in the industry, although smaller listed insurers won’t be spared either.

There are growing calls for direct selling of insurance to be more heavily regulated and for the banning of cold calling as some experts believe it’s inappropriate to sell complex products like insurance through unsolicited sales practices.

Small cap insurers Clearview Wealth Ltd (ASX: CVW) and Freedom Insurance Group Ltd (ASX: FIG) are among the companies that will have to answer uncomfortable questions at the Royal Commission.

Clearview refunded $1.5 million to 16,000 customers after the regulator raised concerns about its high pressure sales tactics that targeted those living in indigenous dominated regions.

The AFR also reported that Freedom Insurance is reviewing its direct sales strategy, which accounted for about 90% of new sales for the group. Both shares have collapsed 30% and 67%, respectively, since the start of this calendar year when the All Ordinaries (Index:^AORD) (ASX:XAO) index is up 1%.

Investors thinking about bargain shopping for insurance shares will be better off waiting for a few weeks as these so-called “value buys” are probably getting cheaper.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. 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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