Britain's largest insurers are preparing to weather stormy stock markets that pushed shares to seven-year lows, but some smaller rivals could need bailing out, industry experts said today.
London's FTSE 100 index of blue chip stocks tumbled below 3,500 for the first time since November 1995, undermining the value of insurers' investments and damping consumer confidence in pensions, savings and insurance policies.
The decline - which has erased over £500 billion sterling from the value of the top 100 companies since the market peak three years ago - also raised fears that some insurers may need to be bailed out with cash from investors or their parent companies.
Falling equities are a particular problem for insurers since they typically have a greater proportion of their investments in shares.
Britain's financial watchdog, the Financial Services Authority (FSA), requires insurers to hold assets to a greater value than their liabilities to ensure policyholders get paid.
Usually those assets are held in the form of shares because they are easily sold to raise cash. The FSA generally requires that assets outweigh liabilities by between 4 and 8 per cent, depending on the circumstances of the insurer.
Insurers have been dumping shares in favour of bonds and even commodities like gold, analysts said, but there was a limit to how much they could sell. And such disposals have the effect of sending the market even lower.
All of Britain's insurers cut bonus payments on "with-profits" policies and pensions last year. Insurers typically pay higher bonuses on with-profits policies and pension savings if the value of shares they are based on rises.
All are expected to cut again this year - Aviva, Britain's largest insurer, has already done so and Britannic has delayed a decision on bonuses due this year until the end of 2003.