SYDNEYSYDNEY (Reuters) - The insurance arm of Commonwealth Bank of Australia rejected a trauma payout to a customer using outdated criterion that found his heart attack was not severe enough, a powerful public inquiry into the financial sector heard on Wednesday.

The inquiry or the Royal Commission, which can recommend criminal prosecutions and tougher regulations, also heard that CBA's CommInsure withheld relevant medical information when the claims dispute was brought before a complaints tribunal.

Details of the 2014 case started emerging in media reports in 2016, sparking concerns that the sector was relying on outdated medical definitions to avoid paying out claims.

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Practices such as this, as well as the sector's high-pressure tactics to sell and retain policies, have come under intense scrutiny with the inquiry turning the spotlight on insurers in its latest round of hearings.

Insurers, such as AIA Group and the Australian unit of Allianz, have already told the inquiry they overcharged customers.

CommInsure's original rejection of the A$100,000 ($70,990) trauma claim was based on its in-house doctor's recommendation that the patient's troponin levels did not meet the "specified severity", the inquiry heard on Wednesday. Troponin are proteins released into the bloodstream after a heart attack.

The unnamed patient recorded a troponin level of 1.9 micrograms per liter, just short of CommInsure's 2.0 microgram minimum, according to disclosures at the inquiry.

Under questioning, CommInsure's executive general manager, Helen Troup, said the insurer knew at the time its definition of heart attack "didn't reflect the universal definition".

CommInsure belatedly updated its definition, the inquiry heard, and eventually compensated the patient, but not before withholding information from the financial ombudsman.

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CBA sold its life insurance unit to Hong Kong-based AIA Group for $3.1 billion last year, but the sale is still to be completed.

PRESSURE TACTICS

The revelations about the insurance sector are among the most explosive to emerge from the year-long inquiry into Australia's financial sector misconduct.

Shares of insurers came under pressure from the scrutiny at the inquiry, with Freedom Insurance Group closing down 20 percent on Wednesday and Clearview Wealth ending down 5 percent.

The inquiry heard that 85 percent of Freedom customers who called to cancel policies ended up keeping the same or an amended policy. Freedom Chief Operating Officer Craig Orton told the inquiry the retention rate was "too strong" and that he was aware of representatives "not taking no for an answer".

"It is too difficult to cancel in some circumstances," said Orton, who conceded some customers had only signed up to take advantage of a period of free premiums. "That's something that I won't allow to happen in the future."

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A lawyer assisting the inquiry, Rowena Orr, said some customers had complained that Freedom staff had "just hung up" when they attempted to cancel a policy.

Orton, however, said he was not aware of that practice.

The Royal Commission is scheduled to hold a final set of hearings in November and provide a report to the federal government in February, which could include proposed regulatory changes to how insurers contact potential customers.

The inquiry has already unpicked the banking, lending and pension sectors. Among Australia's "Big Four" banks, CBA has taken the biggest reputational hit with the commission having exposed how it overcharged and misappropriated funds from customers, including extracting fees from deceased clients.

($1 = 1.4086 Australian dollars)

(Reporting by Jonathan Barrett and Paulina Duran in SYDNEY; Editing by Stephen Coates and Himani Sarkar)