RACQ is selling its insurance arm in a $1 billion deal to a insurance giant currently being sued for allegedly misleading customers.

It's the biggest insurance sale for Queensland in more than 15 years, with customer-owned RACQ selling to a competitor — share market-listed IAG.

But RACQ — one of Queensland's strongest brands with almost 1.7 million members — was assuring customers on Thursday that it would be "business as usual".

RACQ has been struggling with its insurance arm in recent years. 

Regulator crackdown

It's faced a crackdown from regulators over immature risk practices and a backlash from customers for massive price rises and claims handling.

While the organisation has been arguing improvements were being made, RACQ has also been quietly examining selling its insurance arm.

On Thursday, Sydney-based IAG, the insurance giant behind NRMA, announced a deal to pay $855 million initially to RACQ, and potentially another $100 million in two years.

IAG will run the engine room of insurance: claims handling and underwriting. 

RACQ will keep marketing and sales, earning a fee of about 8 per cent of premiums.

IAG chief executive Nick Hawkins maintained his organisation had a history similar to RACQ and the deal would be a "partnership culturally". 

Record $40m fine 

IAG has had a spotted record in the past decade, including a massive debacle where it failed to pass on discounts, which cost it and insurance partners more than $500 million including a record $40 million in the Federal Court in June 2023. 

That court battle revealed IAG insiders had been worried about discount problems for almost six years before the board became aware and took action to address it.

Then in August last year, the Australian Securities and Investments Commission filed another lawsuit alleging IAG had mislead other customers about different discounts. 

That lawsuit alleged IAG had installed an algorithm which deliberately inflated premium calculations for customers perceived as more likely to stay with the insurance giant.

IAG is defending that action and disputing the regulator's allegation of how the algorithm worked.

Asked about these problems, Mr Hawkins said IAG had been investing in improving systems. 

"We definitely acknowledge where we've made mistakes, and we've remediated. But I think it's also reasonable where we believe something's not right, that we defend our position," he told the ABC.

RACQ has also prided itself on being a customer-owned organisation that invests its profits into members or the business, rather than paying out dividends to shareholders.

Now its customers will be transferred to a share market-listed entity. 

'We understand mutuals'

RACQ chief executive David Carter said IAG already worked with similar customer-owned organisations in Victoria and NSW, "so we are very confident (IAG) understand what is at the core of these organisations".

He rejected that having an ASX-listed entity takeover would be bad for customers, saying RACQ and IAG had been aiming for similar long-term earnings targets.

"We think we can achieve the same outcomes for members around affordability and accessibility and we can create capacity for us to invest in the other things that are important for RACQ. They do understand mutuals [customer-owned companies]," he said.

Mr Carter said the insurance sector would need large investments in technology and regulation.

He said the proceeds could be used to reduce prices of roadside assistance offerings and invest more in communities and other transport initiatives.

Asked about the deal's effect on premium prices, Mr Hawkins argued the scale of IAG would bring an advantage, and overall the level of price inflation had been easing.

The deal is subject to clearing any Australian Competition and Consumer Commission concerns.

IAG is one of Australia's big two insurers, but only has about 5 per cent market share in Queensland. That would increase to more than 20 per cent if the RACQ deal is completed.