News of RSA's £5bn (€6bn) bid for Aviva's general insurance business in Ireland, the UK and Canada inspired scepticism in this country over competition concerns. But if a merger ultimately goes through, it could actually create buying opportunities for other players in the market if the Competition Authority forces disposals where concentrations are greatest.

Aviva is already the biggest general insurer in Ireland followed by RSA, FBD, Quinn, Allianz and Axa – all with roughly equal shares in the 10%-12% range. A combined RSA-Aviva company would have about 27% of the market, or more than twice the next-biggest player.

Where it gets interesting is in the market for household insurance, where the concentration, market share and pricing power would be very lopsided. RSA is the Irish leader in household insurance and Aviva is in the second tier with the other major insurers. But a combined RSA and Aviva would dominate with 35% – or three times – its nearest rival.

Insurance sources said the Competition Authority would most likely examine individual classes of insurance, rather than overall market share, when judging any competition issue, and the household class would most likely cause concerns. RSA-Aviva would only just edge out the next-biggest competitor in motor insurance, for instance, and Allianz would remain top in commercial property insurance, another big class.

Sources said the Competition Authority could cause a major reorganisation of the insurance market by forcing a merged RSA-Aviva to shed bits of the merged business, such as part of its household business, to balance market shares and prevent prices from being squeezed too high.

Premiums for household insurance were up 10% in 2009 and are still rising, according to the Irish Insurance Federation. The driving factor behind this is claims costs. The total estimated property cost of the November floods and the Christmas freeze last year topped €540m. The insured cost exceeded the total for all other weather events in the past decade. Aviva alone, because of strong market share in the worst affected regions of Munster, paid out claims of about €250m.

The sale of Aviva's general insurance business would also put its life and asset management businesses into play, as its 'composite insurance' model would cease to exist because it needs the cash generated by the general insurance side of the business.

This would have implications for Irish Life and Permanent, as well as big multinational groups in the market such as Axa and Zurich, especially in light of the coming forced sales of New Ireland Assurance, Bank of Ireland Asset Management and AIB Investment Managers.

"We see the approach as positive for Aviva and the sector," said Oliver Gilvarry of Dolmen Securities in a note last week. "It highlights the attractiveness of Aviva's general insurance business and does raise the possibility of the break-up of the group."

Yet Aviva's board dismissed the initial offer two weeks ago without even consulting shareholders. RSA came back last week with an announcement that it had backing from Deutsche Bank, BNP Paribas and HSBC to underwrite a £5bn rights issue to pay for the takeover.

Some of Aviva's biggest shareholders, including some with holdings in RSA as well, are now pushing for the board to reconsider the offer or at least open discussions with RSA. They believe selling the general insurance business would release value in the group. Many were said to be disappointed with Aviva's share price performance and relatively poor return on equity.

Standard Life, a competitor of Aviva's on the life side which owns 2.8% of Aviva and 4% of RSA, is pushing the Aviva board to reconsider while advocating a higher bid from RSA. Analysts said an £8bn offer would be hard to turn down. However raising that kind of capital would not be easy for RSA, given its market capitalisation is just £4.3bn.

If that kind of money is not forthcoming, any deal might founder on value terms. One solution, touted by the Financial Times' influential Lex column, would be for Aviva to buy RSA and spin off the general insurance business as a wholly-owned subsidiary, thereby maximising the synergies while retaining the cash-generating capacity for the composite insurer.

Whether or not a deal gets done, analysts and investors in Ireland are taking the line that any activity is good news.

"Even if it's just rumour, thank God we're talking about deals in Ireland," said one institutional investor source.

"The approach must be seen as a positive within the context of the view for the Irish economy, with the UK insurer taking an aggressive line in expanding its Irish exposure," said Kevin McConnell, head of research with Bloxham Stockbrokers.

FBD reports interim earnings next week and analysts are expecting positive news, especially on premium growth, following recent results from foreign insurers in Ireland , including Aviva and RSA

Aviva recorded growth in net written premiums in the first six months of 16.5% versus the second half of last year, while Allianz recorded premium growth on a gross basis of 30%. RSA did not split out its results for Ireland, but the group presentation noted ratings increases of 22% for personal motor insurance and 29% for home insurance year on year.

Insurers still seem to be in the bottom of the cycle, but the trends appear to be positive, making it all the more urgent for consolidators in the market to negotiate deals.