Barclays has teamed up with Privilege Insurance to slash motor renewal premiums in what is already a fiercely contested sector. It is estimated that motor insurers have suffered pounds 2bn of losses during the past two years.
Analysts warned that Privilege Insurance's intervention will force down car premiums further, threatening the profits of several big motor insurance companies, including Eagle Star, Guardian and Norwich Union.
Privilege Insurance is partly owned by Peter Wood, founder of the vastly successful service, Direct Line.
The deal puts Mr Wood and his former company in open competition for the first time. Direct Line is the market leader in motor insurance with over 2 million premium holders. Before teaming up with Barclays, Privilege was regarded as a niche insurer dealing in high-risk motor policies.
Competition between the two firms could be a moot point for Direct Line's owner, the Royal Bank of Scotland, which also has a 60 per cent stake in Privilege. A spokesperson for the Royal Bank of Scotland dismissed this, saying the bank was comfortable with both companies chasing the same business.
However, a spokesperson for Direct Line fired the first salvo when responding to its new rival. "It's an incredibly tough market and Barclays does not have the brand awareness that we have."
Initially Barclays will target its 6 million customers and 7 million Barclaycard holders. Premiums will be sold over the telephone from today and promoted in high-street branches across the country.
Bob Dench, managing director of Barclays Insurance Services, said: "Our entry into the motor insurance market costs us next to nothing. With minimal investment we can guarantee that anyone calling with details of their renewal premium will be offered a better deal by us on the spot."
Commenting on Barclays' strategy, Mark Thomas, banking analyst at Credit Lyonnais Securities, said: "Banks are always looking for new ways to exploit their brand. A ready-made customer base and advances in technology mean it is cheap for Barclays to enter the sector and enjoy a price advantage over its rivals."
Intense competition has placed motor insurance companies at the sharp end of merger and acquisitions in the insurance industry with a string of companies forced out of the market over the past two years.