Watchdog acts to stop forced selling

FSA eases solvency tests for insurers after one of the worst months on record for FTSE 1

The pressure on life insurers to offload shares to meet their solvency margins was reduced last night by the Financial Services Authority, which eased the requirement on insurers to hold a minimum cushion of assets above their liabilities.

The regulator's move came as the stock market suffered further falls yesterday, leaving the FTSE 100 index of leading shares down 9.5 per cent over January. Concern that forced selling of shares by insurers is intensifying the downward spiral in equity markets has grown in the past week as the blue-chip index has revisited seven-and-a-half year lows.

Life companies that fear they may fall below the regulator's solvency limits will have to apply to the FSA for a waiver to the required minimum margin of solvency. Until now, they have had to demonstrate that they hold assets worth at least more than 4 per cent than the liabilities on their balance sheet.

But with most of their assets in shares, insurers have been struggling to balance their liabilities as the market declines. Many have had to reduce their equity exposure to meet the regulations. Insurers have been dumping shares to the tune of £25bn in the past 18 months in favour of less volatile, fixed-income securities.

The FSA yesterday said a number of companies had told it they are "pressing against or have breached" their solvency margin. John Tiner, the regulator's managing director, called on companies on the brink of their solvency margin to "discuss immediately" with the FSA actions to maintain or restore a cushion of assets.

Mr Tiner said falling share prices would continue to have significant impact on the financial position of life insurers. As a result, the FSA will now allow companies to fall below the regulatory solvency level if it is satisfied the breach is temporary and the company is otherwise in a sound financial position.

The FSA's move is intended to stop forced selling of stocks as markets fall. This exacerbates the falls and also damages the long-term prospects of insurers and their policyholders. With a much-reduced equity holding, insurers cannot enjoy any gains from a market bounce.

The relaxation of the minimum solvency margin was welcomed by the Association of British Insurers, which said the FSA has brought in flexibility while preserving strong regulation. "Companies should not be in a position where they are selling shares just because the rules say so," Mary Francis, the head of the ABI, said.

Ned Cazalet, an independent insurance analyst, said the move would not improve the underlying financial strength of companies, many of whom are desperately short of capital, but would provide some breathing space until markets stabilise. He expects a number of companies will apply for some leeway on their requirements.

The FSA has been in close contact with life insurers in the past few weeks as equity markets have continued to fall. This week the regulator revealed it was asking a number of companies what action they were taking to strengthen their balance sheets. This could include closing to new business and scrapping annual and final bonuses.

Britannic has been hit hardest by solvency fears in the sector. Its shares have fallen up to 80 per cent since early January as fears the company was breaching its solvency requirements sparked panic selling.

Investors are also waiting for Standard Life to reveal how it has been affected by the bear market when it unveils details of its bonus payments on Monday. It kept a much higher-than-average weighting in equities and held off from introducing exit penalties until the end of last year. Policyholders should expect to see their payout values hacked back considerably.

Yesterday was another poor day for the stock market, with the FTSE 100 closing down 11 points at 3,567. This was the sixth-largest percentage fall since the index was set up in 1984 and was the second worst for a January. At one point, the FTSE 100 was down 68 points but it regained ground as Wall Street staged a mini-rally.

The benchmark Dow Jones index in the US ended up 109 at 8053.8 last night, boosted by data showing surprising signs of life in America's industrial heartland of the MidWest.