IAG’s bold move to bring about a correction on commercial lines could backfire unless consumers are prepared to wear a price increase, Trowbridge Deloitte has warned.

IAG CEO Mike Hawker has flagged the group’s intention to lift prices in its commercial business, in which premiums have fallen more than 3% in the past 12 months, following year-on-year falls since 2004.

The commercial category includes some of IAG’s most profitable lines, contributing nearly half the company’s total profit on an insurance margin of 18.1%. Commercial lines in fiscal 2007 had written premiums of nearly $1.6 billion.

But Mr Hawker’s pre-emptive strike could repel businesses not prepared to stay with IAG out of loyalty.

Trowbridge Deloitte General Insurance Practice Leader Elaine Collins told Sunrise Exchange News timing a rate rise is difficult. She says rate rises are historically stirred by catastrophe claims rather than a market correction.

“We’ve had a soft market for a few years now, and we have had a significant reduction in profit from it. At some point the market will turn, but it’s difficult to pick the timing.”

Much depends on how commercial competitors Suncorp and QBE respond to the rate increase. Suncorp says it has no plans for lifting rates but hasn’t ruled out a rise in the future.

Of the three big insurers, QBE has the most scope to maintain or further reduce commercial lines pricing, as it can rely on its substantial international book to supplement weaker profit in Australia.

Ms Collins says IAG’s fate also rests on consumer reaction to the rise.

“Psychologically, consumers have to be ready for it,” she said. “If not, they will simply shop around. If IAG does increase commercial premium rates before everyone else, it will either lose business or the rest of the market will follow.

“People may not be in the mood for it. IAG has a better view of customer loyalty than I do, but loyalty can quickly go out the window.”