Antipodeans who have done the “London thing” will attest to the existence of the “UK hump”, a point when the merits of leaving start to outweigh the benefits of staying.

Has IAG reached this point? The UK motor vehicle market is saturated with competition. Aggregators dominate the insurance landscape like mud crabs in a mangrove, squeezing premiums in an online pincer grip. Litigation lawyers turned guerrilla marketers are spruiking “no win no claim” deals against insurers as the ultimate risk-free bet.

The insurers colourfully describe the lawyers’ efforts as “claim farming”, although in a country that loves a punt perhaps “claim jackpot” is more apt.

With the latest profit downgrade from IAG a direct result of either the incompetence of UK management or savage market conditions – some might argue both – the time has come for IAG to revaluate if Blighty is a place they really want to be.

CEO Mike Wilkins is adamant his company really does want to be there. His conviction in the strength of IAG’s UK assets is matched by an unshakeable faith in the local management team, headed by Neil Utley.

But recent revelations about IAG’s UK business do not inspire confidence. IAG announced last week its UK operation recently cost it $365 million in reserve top-ups and new reinsurance arrangements. It must also wear a one-off $86 million write-off in goodwill and intangibles.

The UK division is set to record a loss in fiscal year 2010, a noteworthy failure given Equity Red Star arrived at IAG with an unbroken profit record stretching back to 1969.

All of this is going to push IAG’s full-year insurance margin back to around 7% – a far cry from the 13% it anticipated earlier this year.

True, the Melbourne and Perth storms have caused much of the damage to IAG’s bottom line, but the UK division’s poor performance has shaved a full 500 basis points off its 2010 fiscal year insurance margin. The UK’s troubles are also due to the vagaries of the market rather than the result of unforeseeable natural events.

The downgrade announcement is a major setback for the UK division in particular. It was finally showing a turnaround in its fortunes after lodging solid but not spectacular profits in 2007 and 2008 of $30 million and $53 million respectively. It then went to light speed in fiscal 2009, announcing an insurance profit of $113 million on a fat 15.2% margin – more than double that of the previous year.

However, fiscal 2009 may just be that “hump” where quitting becomes more attractive than staying. In the first half of 2010, insurance margins retreated to 6.6% and will go into negative for the full year before returning to “lower single digits” in 2011.

IAG’s UK incursion is very much a tale of two CEOs.

Arriving in the UK in September 2006 with the purchase of Hastings and Advantage for $350 million, former CEO Mike Hawker decided the UK was worth an additional quid or two, purchasing the jewel in the crown, Equity Insurance Group, for $1.4 billion in January 2006 .

They proceeded to lose IAG lots of money.

The group’s UK strategy took an abrupt about-face when Mike Wilkins replaced Mr Hawker in mid-2008. He wasted no time in offloading the under-performing UK assets.

In January 2009, Equity Insurance Brokers was sold to local insurer Swinton Group for £50 million ($85.52 million) while Hastings and Advantage – the couple that started it all – departed through a £23.5 million ($40.2 million) management buyout.

IAG had paid £140 million ($246 million) for Hastings/Advantage and spent as much as another $1.8 billion building up the UK businesses.

The UK business now only has a carrying value of “less than a billion”, according to Mr Wilkins. These represent huge paper losses for IAG.

The group’s plan to pull up the proverbial socks of its UK arm is arguably risky. Raising premiums by up to 20% will surely provoke some customer blowback. And the exit of all aggregator-sourced business reflects an inability to compete in a market where the majority of motor insurance is purchased online.

Mr Utley says the UK Government is investigating ways to curtail claim farming through the introduction of reforms proposed by the recent Jackson Report. “If enacted, these reforms would lead to a reduction in claims and claim costs which would be to the benefit of both IAG, the industry and ultimately customers who are wearing the higher premiums.”

The key phrase here is “if enacted”. No word from the shaky alliance between Conservatives and Liberals on exactly where tort reform stands on their “to do” list.

Blighty is a risky punt. IAG needs to strongly consider if catching that big red kangaroo home might prove the safer bet.