The Australian Competition and Consumer Commission will take a close look at IAG’s proposed $855 million RACQ Insurance deal, with analysts warning it is not certain it will be allowed.

Morningstar says in a research report that ACCC clearance is a “key hurdle” for the transaction, which IAG expects to close in the third quarter of next year, subject to regulatory approval.

“We expect a decision will hinge on how many competitors are still active in the region, and how much success challenger insurers and subsidiaries of large global insurers are having in the region,” analyst Nathan Zaia says.

IAG has identified Queensland as an attractive growth area where it is “underweight”, while RACQ ranks second behind Suncorp in the state’s motor and home insurance market.

JP Morgan says concentration in Queensland short-tail personal lines could be an issue. It estimates Suncorp has a 31% market share, followed by RACQ with 23%, Hollard with 10% and IAG at 8%.

“The likelihood of deal completion is unclear, as we think the ACCC may raise some concerns, although, prima facie, concentration would not hit extreme levels,” JP Morgan analysts say.

Factors in favour of the acquisition include financial stress RACQ Insurance has experienced in recent years and that as a single-state insurer it is probably economically challenging to continue as a standalone.

“It doesn’t appear as if any other insurers were willing to pay enough to strike an arrangement with RACQ – but it is not impossible,” JP Morgan says. “It wouldn’t necessarily change the competitive outcome though, in most other circumstances, if any of the other realistic suitors were considered.”

IAG plans to buy 90% of RACQ Insurance and enter into a 25-year exclusive distribution agreement. It would have the right to acquire the remaining 10% two years after completion, on consistent terms.

The proposed transaction price comprises $522 million for the equity and $333 million upfront for the exclusive agreement, with ongoing “market-standard commissions” paid to RACQ for product distribution.

There would be no change to IAG’s existing insurance brands, or to RACQ’s brand.

An ACCC spokesman told insuranceNEWS.com.au the regulator has been notified by IAG and RACQ about the potential deal.

The regulator is “expecting a submission in due course, at which point the ACCC will commence reviewing the matter”.

IAG says the transaction is subject to conditions including ACCC clearance, and approval under the Financial Sector (Shareholdings) Act.

"IAG is now in the process of engaging with the relevant regulators," a spokesperson told insuranceNEWS.com.au.

IAG shares closed 3.5% higher at $8.47 after the deal was announced yesterday and were trading higher late this afternoon.

The company is expected to provide more details about its RACQ plans at an investor day on Tuesday.