What does the insurance company ‘mega merger’ mean for your bills?

As insurance premiums soar, consumers have good reason to fear Aviva taking over Direct Line, warns James Moore

The City loves a deal. Consumers, not so much. For them, a tie up between insurance giants Aviva and Direct Line, at a time when car insurance prices are at historic highs, is a far from enticing prospect.

Aviva has dangled £3.3bn in a combination of cash and shares in front of Direct Line, the third takeover proposal the company has received and rejected this year. Belgian multinational Ageas was rebuffed twice. Its best offer was £3.2bn or 239p a share vs Aviva’s 250p.

From the consumer perspective, the more important point is that Ageas is a lot smaller in the UK than Aviva. Confused.com, a price comparison website, puts Aviva at number one in home insurance, with 8.7 per cnet of the market, while Direct Line comes third at 6.2 per cent. Ageas isn’t even in the top five.

It has Aviva at number two and Direct Line at number three when it comes to motor, with the former on 10.6 per cent and the latter on 10.2, behind market leader Admiral (11.3). Again, Ageas isn’t in the top five.

Aviva and Direct Line would thus create a UK Godzilla. While the combition would be bigger in home, it is the motor side that could cause the most controversy because of the battering consumers have recently taken.

A report to the House of Commons shows that car insurance quotes have risen by a brutal 82 per cent since May 2021. The figure for consumer goods and services more generally comes to just 21 per cent.

Before we start levelling accusations of profiteering by a rapacious industry, it should be noted that the surge came after premiums recorded a 16 per cent fall between March 2020 and May 2021, when they hit their lowest level since late 2015.

Covid-19 lockdowns meant people used their cars a lot less, which reduced the number of accidents and (therefore) the cost of claims. Some of the price rise since mid-2021 is down to road usage. Other cost pressures include the decreased availability and rising cost of spare parts for repairs. Difficulties with sourcing parts has, meanwhile, led to insurers spending more on courtesy cars to keep customers moving. The increasing sophistication of vehicles has further added to repair costs.

EY, a consultancy firm, says that claims and other costs incurred by insurers in the motor business actually outstripped the revenue they took in from car insurance premiums over the past couple of years.

But this year is expected to see a marked turnaround. With the level of premiums creating disquiet among politicians, it’s easy to see why the merger of two of the biggest players could cause a fuss.

Regulators have attempted to ease the pain by, for example, demanding that insurers offer the same deals to existing customers as they hand to new ones. They may be called upon to intervene again.

Home insurance rates haven’t been quite so nasty. But figures from the Association of British Insurers (ABI) still show that they rose by 3 per cent in the first quarter of 2024 and 4 per cent in the final quarter of 2023. When you compare the first quarter of 2024 with the same period in 2023, they leapt 19 per cent.

The trade body stressed that in “real” inflation adjusted terms, the cost of covereing your home was “still below the peaks seen in (the first quarter of ) 2016” when the average was £419. But I doubt very much that the typical consumer will be thinking “that quote is awful but at least it’s better than in 2016 in real terms” when they’re up for renewal. They’re more likely to spit out a few choice four letter words.

Don’t worry, was Aviva’s message. It said its proposed deal is about “creating a more efficient platform from which to serve existing and new customers”.

“In addition, the acquisition would allow Direct Line customers to benefit from Aviva’s breadth, scale and financial strength.”

The trouble is, I’ve read statements like that before. I would once again counter with: “What happens when you take one of the biggest players out of the market to create a juggernaut?” Aviva’s approach suggests it is confident that it can satisfy the Competition and Markets Authority. I suspect the consumer will hope the watchdog takes a more jaundiced view.

Before that, there is still Direct Line’s board to contend with. The approaches by Aviva and Ageas have a lot to do with its troubled recent history. However, it has a new management team, led by former Aviva exec Adam Winslow, and one of the best brands in the UK industry. Direct Line’s board – which has refused to entertain talks with Aviva at the current price – has a solid case for sticking to its guns.

However, it may not be able to hold out if Aviva improves its proposal. Direct Line’s shareholders have the whip hand and they could force the issue if they think the bid premium is sweet enough.