FSA examines capital requirements for UK insurers

Shares in Aviva and Prudential continued to slide today amid City fears the banking crisis will spread to the insurance sector.

The FSA is understood to be exploring the possibility of relaxing the capital requirements for UK insurers in light of the financial turmoil.

Aviva and Prudential, the UK’s two largest insurance companies, saw their stock slide for the second day running.

Aviva’s stock had dropped 9.95 per cent yesterday and a farther 12.68 per cent today. Prudential slid 19.53 per cent yesterday and was down 9.32 per cent today as concerns remained over its corporate bond portfolio.

Both companies have also been hit by a Goldman Sachs research note which said they might struggle if the markets continued to fall.

However, since the market turbulence, both companies have stressed their capital base is strong.

“My concern is that the maelstrom is moving from banks to insurers,” said Justin Urquart-Stewart of Seven Investment Management told www.cityam.com. “All insurance companies have to be regarded with a level of caution.”

Responding to recent reports on the status of UK insurers, Peter Vipond, regulation director at the ABI said

"The British insurance industry entered the current period of market turbulence in a far stronger position than in 2003. Firms have, for example, changed their business models and now rely far less on equity holdings. Above all, working with the FSA, firms have introduced a new generation of risk controls, which require them to use realistic numbers for assets and liabilities and stress the actual risks their business will face.

"None of this means the industry is complacent, there have been major falls in key markets, and there is no guarantee that the current market conditions will come to an end soon. These conditions, coupled with the specific challenges of bank recapitalisation, pose real issues.

"But this should not be confused with the underlying strengths of this industry."