IAG, which sells insurance under brands including NRMA, CGA and Swan Insurance, on Wednesday said profit margins would narrow in the year ahead, triggering an 8 per cent drop in its share price, to $6.22.

Chief executive Peter Harmer said the two biggest drivers of the margin pressure were higher average costs for motor vehicle repairs, and a run of large claims in its commercial business, and he was confident of addressing both pressures.

In motor, Mr Harmer highlighted the growing amount of technology used in sensitive parts of cars - especially bumper bars - which had caused a sharp rise in smash repair costs.

"The parts of some vehicles, particularly grilles and bumper bars, have actually sky-rocketed in the past little while, and we've obviously got to make sure that we recover those input costs," he said.

He gave one example of a car with a grille that cost $21,000 to replace, and said there were more "constructive write-offs" - where the cost of repairing a car exceeded its current value.

"There is an increase in the number of vehicles written off simply because the cost of repairing them exceeds the cost of replacing that vehicle," he said.

This dynamic drives up the costs for IAG, and he said it was trying to pass some of these on to consumers. It is also trying to control costs by having more work done within its network of car repairers, and working with manufacturers on "reasonable and sustainable" pricing of car parts.

The result also included "elevated large losses" in its commercial division, and the company said insurance prices would likely continue to rise in this part of its business.

IAG's net profit rose 48.6 per cent to $929 million, helped by stronger investment income and reserve releases thanks to the low inflation environment.

In the year to June its reported insurance margins widened from 14.3 to 14.9 per cent, helped by reserve releases. However, its outlook for reported insurance profit margins was between 12.5 per cent and 14.5 per cent for the year ahead, in part due to the higher costs in motor and commercial insurance.

Shaw Stockbroking analyst David Spotswood said the slump in the share price was an example of company shares being priced for high expectations, and then falling sharply on cautious outlook statements.

Until Wednesday's fall, IAG's shares had jumped 30 per cent from their lows of last November, trading at a record high of just below $7 in June.

"I think it's all about expectations. They are too high," Mr Spotswood said.

IAG will pay a fully franked final dividend of 20?? a share on October 9.

Insurers have benefited from the low rate of inflation, and IAG in June had flagged to the market that it would be releasing reserves this year, bolstering profit growth.