Challenger brands are continuing to gain ground on IAG and Suncorp in the Australian motor insurance market, according to a new report from Merrill Lynch.

The two leading companies control about 70% of the market, which in turn accounts for about 24% of total premium revenue nationwide.

“The importance of the class to domestic listed insurers can’t be underestimated,” the report says. “It accounts for about a third of IAG and Suncorp’s insurance premiums and is a highly profitable class.”

Challenger brands have been attracted to the market by high returns, a relatively stable regulatory backdrop and diminishing barriers – and they are growing faster than the traditional players.

“While the major insurers and broader motor insurance market grew at 3-7% [last year], the challenger brands recorded much higher double-digit growth once again,” the report says.

“We estimate challenger businesses now underwrite easily more than 8% of the Australian private motor insurance market, versus 6% two to three years ago. IAG and Suncorp are, unquestionably, losing share.

“We see the class as a major cash cow that could be threatened over time as the challenger brands gain further strength.”

However, Suncorp spokesman Chris Newlan says small players have had “no material impact” on the company’s market share.

“Challenger brands have tended to focus on price as their core value proposition,” he told insuranceNEWS.com.au. “Going for price over service delivery is a dangerous trade-off.”

And IAG has also “seen no noticeable impact on our volumes from newer entrants”, according to a spokesman.

“We treat all of our competitors seriously. Our primary focus, however, is on our own business, getting the fundamentals right and delivering for our customers.”

The number of cars on Australia’s roads continues to increase, with about 12.7 million passenger vehicles at December 31 last year, the report says. This trend is expected to continue due to population growth.

But more efficient and safer vehicles are resulting in fewer accidents. road fatalities peaked in 1970 at 3798, Australian Bureau of Statistics figures show.

The figure more than halved to an annual average of 1641 between 2000 and 2008, and in 2009 it had fallen to 1477.

“Offsetting this is possibly the higher cost of repairing the new cars, but the past few quarters show a drop in the average claims size index,” the Merrill Lynch report says.

Pricing pressure in the market has eased in the past year, with industry premium growth averaging 6.4% in the past four quarters, according to the Australian Prudential Regulation Authority.