The pending merger between Aviva and Direct Line, although beneficial to stockholders, could harm consumers and the wider economy, according to financial journalist Matthew Lynn in his article published in The Telegraph on Sunday.
Last Friday, Aviva and Direct Line announced that they have entered into a preliminary takeover agreement after Aviva sweetened its deal to 275 pence a share, for an aggregate value of 3.61 billion pounds.
With the deal now looking certain to go ahead, Lynn said this mega-merger will not help in significantly bringing down sky-high premiums for customers, nor will it benefit the wider economy.
“The blunt truth is this. Shareholders will benefit from the merger of Aviva and Direct Line,” he wrote. “But it won’t do anything for the consumer or for the wider economy – if anything, both will suffer.”
Despite assurances that policyholders will be protected and that operational efficiencies due to the merger will yield cost savings that will eventually be passed on to ordinary drivers, Lynn said that competition within the market would still be affected.
“Every time one of the major players is taken out of the market, competition is inevitably reduced,” he said.
Aviva and Direct Line are the second and third biggest motor insurers in the UK, respectively. However, Direct Line has been facing challenges, especially this year, following profit warnings and leadership changes within the company.
Citing a report from the House of Commons, Lynn said that car insurance prices rose by 82 pence between May 2021 and June 2024 – although this may have been affected by the special circumstances during the COVID-19 pandemic lockdown which significantly reduced prices.
“Even so, it is hard to believe, to put it mildly, that combining two of the largest players in the market is going to bring those bills under control,” Lynn wrote. “If anything, it is going to drive premiums higher, and they are already unaffordable for many people.”
Management’s focus would also be affected by the merger. Instead of investing in artificial intelligence and other advanced technologies that would drive prices down and make it more efficient for policyholders to file their claims, management’s energy will be focused on integrating the two companies, stripping out costs and increasing prices where they feel confident that they are big enough not to worry too much about competition, Lynn said.
“Almost nothing goes into developing new products or figuring out how to deploy new technologies,” he added.
Aviva shares closed 1.5% lower on Friday to 482.30 pence share, while Direct Line gained 6.5% to 251.43 pence a share.
