The Consumers' Association has warned of a threat to customers if other large insurance companies follow the lead of General Accident and Commercial Union in their merger.

"At the moment, there will still be well over 100 different companies, so there will still be plenty of choice," said Consumers' Association spokesman Michael McAteer.

"But in the long term, if the big companies get a stranglehold, that will be bad news for customers," he said.

Philip Telford, a senior researcher for Which? magazine, agreed that there could be a long-term danger but said that people looking for new policies could benefit.

"When there's a scamble for mergers, usually in the short term it's very good for consumers. Supermarkets are a good example of that, where there's lots of good deals and promotions on offer because of the intense competition."

A spokeswoman for the two companies said that they could not comment directly on the effect for shareholders at present, but did not expect the move to have any impact in the short term.

The Confederation of British Industry said the British insurance business would have to see mergers to meet the challenge being posed by European companies.

"The UK's insurance industry needs to consolidate further to meet the challenges of Europe's Single Market and the competitive threats posed by some of Europe's insurance giants," said CBI Director Iain McMillan.

The creation of CGU is the latest in a string of insurance mergers and takeovers. It is the biggest since Royal and Sun Alliance announced that they were merging in 1996.

It also gave the City a much-needed boost after the acrimonious collapse of merger talks between pharmaceutical giants Glaxo Wellcome and SmithKline Beecham.

Savings of £225m would be made within two years of the completion of the merger from combining the two companies' running and staff costs, the company spokesmen said.

Philip Twyman, the Group Executive Director designate, said that the deal was expected to take until June to be approved by regulators, and added that integration would take a further two years to complete.

Direct Line: a success story

The combined company will then be ready to meet the challenge of the direct insurers who have forced their way into the British market in recent years.

Leading the field is Direct Line, which has become the biggest car insurer in the country in the 10 years since it began.

The Chief Executive of Direct Line Group, Ian Chippendale, said: "The agreed merger of GA and CU is another example of the much-predicted consolidation among companies who are keen to improve their market position by shedding costs.

"This creates another insurance giant but it also creates yet another new name and new brand. Against this background, Direct Line remains singular in the strength of its brand."

Companies like Direct Line lower their running costs by cutting out brokers and talking to clients directly by phone.

Both GA and CU continue to use brokers. The 3,000 jobs in this area are probably those most at risk.
 

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