A tax hike on British motor and home insurance policies effective from Sunday is set to hit consumers and could trigger a fresh round of margin-squeezing price competition among general insurers.

The jump in the insurance premium tax (IPT), to 9.5 percent from 6 percent, was a surprise announcement in the July budget and could be a particular blow to motor insurers like Admiral and Direct Line, already struggling to compete on price, analysts said.

While motor premiums have risen recently as a result of higher claims, this follows years in which insurers have faced stagnant prices and been forced to release reserves set aside for past-year claims in an effort to bolster profitability.

“These (tax) increases will not translate into margin expansion and may even make it difficult for insurers to push further … rate rises through,” analysts at Morgan Stanley said in a note to clients.

FTSE 100 firms Admiral and Direct Line released reserves to boost first-half profitability – a strategy which analysts and regulators don’t see as sustainable.

Mid-cap firm esure Group saw a drop in first-half pretax profits “in challenging market conditions.”

With higher prices likely to encourage motorists to shop around for their policies, causing churn in the sector, the key will be keeping hold of customers.

“The concern is what happens to retention,” said Andy Hughes, insurance analyst at Macquarie.

Motorists are likely to feel particularly price-conscious given quarterly comprehensive car insurance premiums clocked the biggest rise since 2010, a recent report using data from price comparison website confused.com showed.

That was fueled in large part by a slide in oil prices that in turn has encouraged more activity on the roads, leading to more accidents and claims, analysts said.

Direct Line estimates that younger drivers in particular could feel the pinch of the tax rise. The average premium in the first half for a driver aged between 18 and 20 would have risen 35 pounds ($53.54) under the new tax rules.

Despite the competition for business, insurers are expected to pass most of the tax hike onto drivers.

“Looking at the underlying profitability of the motor insurance industry, I do not think there is space for the industry to take that (tax cost) on,” said one senior insurance executive.

The British motor insurance market last made a profit in 1994 and made an underwriting loss of 31 million pounds ($47.42 million) in 2014, data from the Association of British Insurers showed.

Motor insurers can take some solace from the fact insurance is mandatory in order to drive a vehicle on British roads, said Eamonn Flanagan, analyst at Shore Capital, but household insurance demand could see a dip.

However, esure Group, which offers motor and home insurance products through its esure and Sheilas’ Wheels brands, said it did not expect a fall in home insurance customers as most people with a mortgage will still be required to have house insurance.

Of the 26.7 million households in the UK in 2013, 20.4 million had household contents insurance and 17 million had buildings insurance, ABI data showed.

The falling cost of home insurance may also mitigate the impact of the tax rise. AA data showed the average quoted premiums for buildings, contents and combined policies all fell in the third quarter, continuing a near-three year trend.

($1 = 0.6537 pounds)