IT WAS a sector waiting for a deal which would spark a new round of consolidation. That deal in the mid-size insurance market came last week, when Resolution Life agreed to combine with Friends Provident in an £8.6 billion nil-premium merger.

The deal is aimed to take Colin Cowdery's Resolution, which has more than half of its 3400 employees based in Glasgow, to the next level.

It would give the company a "live" brand to spark a new wave of business to add to the slew of closed funds that Cowdery has been buying since he set up the business in 2003.

Speculation that Resolution was going to do a deal has been rife since March, when the then chief executive Paul Thompson resigned in a surprise move. The firm had originally said in November that it was in discussions with various parties about a possible deal.

The deal that has emerged will produce a new combined group to be called Friends Financial which, the two companies said, will result in annual cost savings of at least £100m by 2010.

A bit over half that sum will be achieved by the integration of the two companies' head offices, with a further £26m expected to be achieved by the joining of the two firms' fund management arms.

One insurance media observer said: "There is an industrial logic in joining Friends Provident and Resolution, putting together the closed funds with the marketing push of the Friends Provident brand.

"Those and other companies have been doing the rounds looking at a possible deal. Other companies in the mid-insurer sector will look at things afresh now that the deal is on the table and the question is whether anybody will seek to break up the party."

But other industry figures, including one big shareholder in Friends, were less happy about the case for the deal. The shareholder told the Financial Times: "It is a nil-premium merger for the group and a sad indictment of the business. The strength of feeling among Friends Provident shareholders may mean that they will struggle to get it through."

And there were further signs that the bid would not go ahead unchallenged towards the end of last week when Hugh Osmond, the entrepreneur behind the Pearl Group insurance business, began snapping up shares in Resolution. He was thought to be adding a further 5% to the the 11.38% stake he has built up in Resolution since April.

Osmond is said to believe that the planned merger makes no sense for Resolution shareholders and has asked for a meeting with the group to hear its reasons for the deal and discuss other possible options.

Resolution said in a statement: "With regard to all shareholdings, Resolution has always been relentlessly focused on delivering shareholder value, and we will listen to anything that creates this value."

It is the nil-premium structuring of the deal that is causing some shareholders most disquiet. Some Friends shareholders are unhappy that Resolution is not paying a premium for a deal that arguably gives it much needed marketing muscle with a live brand.

And some Resolution shareholders are concerned that the deal is moving the company away from Cowdery's original vision for the business.

Other industry observers are questioning whether Resolution and Pearl would be a better combination. It would, however, bring together two titans of the business - Cowdery and Osmond - in what might be an uneasy combination.

Cowdery has indicated that management's focus will be on the integration of Resolution and Friends rather than further acquisitions. He said last week: "Between now and 2010 I would expect most of our time and attention to be focused on the merger." But he added that it would be "foolish to ignore" the right acquisition if it came along.

THIS sparked speculation last week that the business would now withdraw from a four-way £1bn auction of Abbey Life closed funds. The other bidders who have tabled second round bids are Osmond's Pearl Group, Deutsche Bank and Swiss Re.

The deal will also raise new questions over the best future for Standard Life, another company in the mid-insurer sector. One source said: "Many people will be saying that there are only two ways to go - either to be big or to be niche.

"Standard Life's management and board will presumably be examining where they want to be as the sector consolidates. Because it is in a position where 65% of its shareholder base is retail and only 35% institutional, it is likely to be under less pressure from the institutions than some other groups.

"But the directors will no doubt be looking at things again."