The new Royal Sun Alliance will be Britain's largest household insurer with about a fifth of the market, and in car insurance will come a close second to Direct Line.
The agreed merger is the biggest reshuffling of the pack in the UK insurance market for more than a decade and is aimed at cutting costs at a time of fierce competition, as well as combining forces to expand in overseas markets.
The City saw the merger plan as the start of a new wave of consolidation in the UK market, encouraging speculation that names such as GRE, Commercial Union and General Accident could be caught up in takeover fever.
Most of the job losses will come from the merged group's 28,000 UK employees, and the cuts are part of a plan to save pounds 175m a year from 1998.
Royal and Sun Alliance are sharing out senior executive and board positions, with only two of their executive directors departing.
Roger Taylor, the pounds 375,000-a-year chief executive of Sun Alliance, who is to be executive deputy chairman, said most staff cuts would be voluntary and through normal turnover, but did not rule out compulsory redundancies.
Roger Lyons, general secretary of Manufacturing Science Finance - the insurance industry union - attacked the jobs threat. "This is the very opposite of stakeholding company behaviour," he said. "We are seeking urgent discussions. There is certainly no 'feelgood factor' amongst insurance staff today."
Michael Meacher, Labour's employment spokesman, called for an Office of Fair Trading inquiry into the merger. "It has no logic except to sack staff to increase excessive shareholder dividends," he said. "The merger will not lead to wider consumer choice or better service - in fact quite the opposite."
The companies claimed there would be no threat of an investigation by the competition authorities, because their combined share of the household insurance market - where premiums have dropped sharply - would be less than the 25 per cent threshold for an inquiry by the Monopolies and Mergers Commission.
An insurance industry survey yesterday showed the two having a combined 24.8 per cent of property insurance, but Mr Taylor said this excluded a number of competitors, and the actual share was about 20 per cent.
However, he admitted the company had 45 per cent of a specialist engineering market that insures and inspects boilers, which could cause monopolies problems.
In the intensely competitive car insurance business, the combined group will have 11 per cent, just behind Direct Line, the market-leading telephone insurer. Mr Taylor said he did not expect motor premiums to start rising again until near the end of the year.
The merger is technically a takeover of Royal by Sun Alliance so it triggers the share options of Royal's directors.
Apart from one who is leaving they have all agreed to transfer their options to the new company. Richard Gamble, the pounds 430,000 a year chief executive of Royal, has options showing a profit of pounds 500,000.
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