Insurers can weather the storm

THE Financial Services Authority today took the unprecedented step of trying to shore up investor confidence in the ailing life insurance sector by saying the industry could absorb further big falls in the stock market without becoming insolvent.

The City watchdog, headed by Sir Howard Davies, said investors' fears had been 'overdone' and insurers had 'significant ability to withstand further large falls in equity values'.

Its finding stemmed from an assessment of Britain's 20 biggest life insurers, which account for about 90% of the market, when the FTSE 100 index was around 4000. But the index has fallen to 3733.3 points today. The FSA declined to say whether this constituted a 'large fall'.

The FSA's intervention comes amid concerns that the solvency of the insurance giants could be tested, and in some cases breached, by the impact of falling share prices on their investment portfolios. This, in turn, has sparked fears that they will be forced to dump huge tranches of shares to boost their liquidity, putting further pressure on the stock market.

An FSA spokesman said: 'People have got it in their minds that this industry is teetering, but they are just going over the top. We want to make it clear we have seen these figures and this is our assessment of the situation.'

The FSA's conclusion comes a day after Standard Life joined other insurers in slashing bonus rates on its with-profits fund and Equitable Life said it would have to pay as much as £75m to compensate a group of policyholders.

The insurers were asked by the FSA to compile a 'realistic assessment' of their liabilities taking into account guaranteed and future discretionary benefits and future investment returns. The FSA added: 'Firms need to hold assets well in excess of these best estimated liabilities to absorb unexpected losses and liabilities and to support future new business. The survey confirms that the insurance industry does indeed hold such excess assets.'

The FSA's confidence booster coincides with the release of its review of the methods it uses to assess insurers' finances. The Tiner report, set up following the Equitable Life debacle, says that from now on the FSA will conduct risk-based assessments of insurers in the same way it does for banks. It is now conducting risk assessments of the 200 biggest insurers.