ABI rages at cost to members of Bradford & Bingley bail-out.

The UK insurance industry began to deal with the fall-out from the near collapse of AIG in another extraordinary week for financial services, as two more banks in the UK and Europe had to be effectively nationalised.

As Insurance Times went to press, money markets worldwide were in freefall following the rejection by the US Congress of President George W Bush’s $700bn (£394bn) rescue package for American banks. A further vote was expected today.

AIG announced on Monday that it was considering selling more than 15 businesses, including a stake in its reinsurance arm, Transatlantic Holdings, and a large chunk of its property portfolio in an effort to repay its $85bn government loan.

In the UK, AIG was thought to be cutting rates in an attempt to hold on to business and offering staff cash incentives to stay put.

Large brokers were writing business with the state-backed insurer, but were keeping a watching brief. Rumours of clients looking to move their business continued to circulate in the market.

On Monday morning, as the crisis deepened, the British government stepped in to nationalise Bradford & Bingley (B&B), the mortgage lender. B&B’s £20bn savings business and branch network will be bought by Abbey, which is owned by Santander, the Spanish banking group.

The rest of B&B’s business, including its £50bn mortgages and loan book, has been taken into public ownership by the government.

The ABI reacted with fury to the deal, because banks and insurers will have to pay up to £14bn into the Financial Services Compensation Scheme to cover any unexpected losses from the nationalisation of B&B.

ABI chief executive Stephen Hadrill warned it could lead to a rise in premiums, saying: “Insurers are livid at the way that this has been handled.

“If it’s going to fall on the companies in due course, insurers are going to have to try to find that money from somewhere.”

The IIB has warned its members that brokers may have to contribute as well if the compensation scheme has to pay out more than £1.84bn a year.

It is believed that B&B will not offer any more insurance policies, though the Treasury was unable to confirm this at the time of going to press.

Zurich, Norwich Union and Fortis are among the insurers that have affinity deals with the bank.

It is understood that talks regarding these relationships will be held this week.

The Belgian bank Fortis, owner of Fortis UK, also teetered on the brink of collapse before an €11.2bn (£8.9bn) cash injection from the governments of Belgium, Luxembourg and the Netherlands.

Fortis UK insisted it was “business as usual”.

The CBI summed up the mood on Monday with a report predicting that thousands more jobs would be shed from the financial services sector in the coming month. The report, produced with PricewaterhouseCoopers, said profitability and business volume fell sharply in the third quarter.

John Cridland, deputy director-general of the CBI, said: “One year after the credit crunch first took hold, business volumes and profitability in the financial sector have taken their hardest hammering yet. Firms have become more fearful about the extent and length of the credit crunch, and they are now looking to cut more jobs and scale back investment.

“The survey paints a bleak picture, but the dramatic turbulence across the world of finance over the past fortnight, and the renewed paralysis in interbank markets, will only have depressed market confidence even further.”