Life insurers face Footsie fall burden

BRITAIN'S embattled life insurers could be forced to set aside billions of pounds in extra reserves if the FTSE 100 index falls below 4200. The legal requirement could make some insurers sell shares at what they see as temporarily depressed prices, and raise fresh equity through rights issues or invest the proceeds in bonds, bringing the prospect of even lower returns for holders of with-profits policies.

The Financial Services Authority's resilience test requires insurers to have enough cash reserves to ensure they stay solvent if the Footsie suddenly drops 25%. The reserves allocated by insurers at the start of the year were based on it dropping 25% from its then level of about 5200 to 3900. But analysts say these reserves would start to be seen as inadequate once it fell below 4200.

The FSA relaxed the test in September in response to the sharp fall then and reapplied it in December. But it is understood it does not intend to ease it following the latest falls.