Following the Company's admonition that it was cutting its full-year insurance margin because of problems in its UK motor insurance business, INSURANCE Australia Group's shares fell as much as 10.8 per cent.

By early afternoon IAG shares were down 19 cents, or 5.3 %, to $3.42 in a share market up 0.2 %. The stock fell as low as $3.22 in the morning session.

The general insurer said it estimated to identify a one-off pre-tax charge of about $365 million in the year to the end of June and post a full-year insurance margin of 6-7 %, down from previous guidance of 9.5-11 %.

UBS head of Australian sales George Kanaan expects the market will downgrade its full-year earnings probability for IAG by more than 30 %.

The $365m one-off charge was largely due to an increase in bodily injury claims in Britain, a problem facing the entire UK motor insurance industry, IAG chief executive Michael Wilkins said.

"In light of this and a significant deterioration in claim payments in the opening months of calendar 2010, a further review of our UK claim reserves was undertaken", he said."This has revealed that a significant revision to our reserves is required".

The one-off charge includes a $60m net charge associated with a new reinsurance arrangement to limit exposure to further claims deterioration in the UK.

The company also announced insurance margin guidance for next financial year of 10.5-12.5%, which it said reflects confidence in the continued underlying improvement of its overall business.

The conjectures for next year include only a modest contribution from the UK business.