Life assurance firms on 'critical list' as shares plunge

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Greenspan says US activity has 'ground to halt'

Many life assurance companies have been put on a "critical list" of closely scrutinised savings organisations amid fears that the dramatic fall in share prices could drive some of them to the wall.

The list has been drawn up by the Financial Services Authority, the City watchdog, that is concerned about the solvency margins of several life assurance companies.

"When the stock market is as fragile as it is, some life companies could go under," an FSA source said. "A lot of them are actively stress-testing for solvency. We are keeping a closer eye on some than others."

Stock markets fell heavily again yesterday. Growing fears of global recession drove the FTSE-100 index of leading UK shares to a four-year low, wiping £39bn off the value of the London market. It closed at 4557, down 165 or 3.5 per cent. The New York stock markets also suffered a further heavy fall.

As the markets fell, evidence emerged of "distress selling" of equities by some big insurance and life companies. Under the rules, life assurers can be forced to dump shares if there is any danger of them failing to meet their liabilities.

The market mood was further dented after Alan Greenspan, the chairman of the US Federal Reserve, said last week's terrorist attacks would damage the economy in the short-term by making Americans fearful of the future.

"Indeed, much economic activity ground to a halt last week," he told the Senate Banking Committee. "But the foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past."

News of the FSA's "critical list" emerged as Equitable Life published compromise proposals designed to settle the claims of various classes of policyholder over its assets and limit the society's slide towards financial ruin. The FSA warned in a statement yesterday that if the Equitable compromise was not achieved "the outlook would remain uncertain in already uncertain market conditions".

The FSA source declined to identify any of the other life companies put on its "critical list" because publicity might make failure more likely.

Insurance companies have come under increasing pressure because while their liabilities have remained virtually unchanged, their assets in stock-market shareholdings have been shrinking. Many insurers have been forced to impose Market Value Adjustments (MVAs) ranging from 5 to 15 per cent of policyholders' funds to put off savers from demanding their money back early.

In theory, these penalties are designed to ensure that departing policyholders do not take more than their fair share. But in practice, they are being seen as a way of deterring policyholders from quitting, so that the insurer does not have to raise money to pay them off.

There is no suggestion that any companies which have imposed MVAs are in danger of going bust. But a combination of falling values and departing policyholders has forced companies to sell large parts of their share portfolios and transfer the money into government bonds which hold their value when interest rates are falling.