Both Standard & Poor's and Moody's Investors Service said yesterday they were likely to publish reports in the next few months, downgrading previous assessments of several companies in the sector. Among those considered vulnerable by analysts are Royal Life, Guardian Royal Exchange and Legal & General.
The downgrading comes after Norwich Union, the UK's second-largest mutual insurer, had its financial strength rating reduced by Standard & Poor's on Tuesday.
The rating agencies said that growing competition and falling premium income in the life and pensions side, coupled with the savage effect of direct insurance on general business, were likely to have a downward effect on several companies.
Rafael Villareal, a senior analyst at Moody's, said: "For many years policy-holders did not know any better in terms of the charges they faced from companies. In the past year or so that has changed. There has also been the effect of the rules on disclosure of charges, together with the realisation that there are other investments, like unit trusts, that are as attractive or more so."
Companies involved in general insurance faced other problems, in part due to the fact that their business cycle was once again beginning to slow down after a several years of reasonable underwriting returns.
Karen Knoller, director of insurance rating services at S&P, said: "We are looking quite intensely at the insurance industry. We think some companies will be able to cope. Others will find it very difficult.
"Over the longer term, it is true that there are demographic and societal changes that can lead to an upturn in demand. But it is also true that there is increased competition from banks, and new life operations are being set up."
David Leighton, head of legal and fiscal affairs at the Association of British Insurers, said that while many companies had gone through a difficult period, this was being resolved. "At the end of 1991, figures for the UK general insurance market showed that companies had free reserves, as a percentage of premium income, of 50 per cent. By the end of last year, this had grown to 64 per cent."