Royal Bank of Scotland tipped to cut £7bn price tag for insurance arm as it downsizes.

The UK’s third largest insurer, RBSI, is still on the market following the effective nationalisation of its parent company, the Royal Bank of Scotland.

The bank is set to make sweeping job cuts and dispose of numerous assets following its £20bn lifeline from the government. One of the conditions of the cash injection from the Treasury was a “significant downsizing”.

Other governments around the world were following Westminster’s example this week, pledging rescue packages for banks running into trillions of pounds.

The sale of RBSI, which includes household names such as Direct Line, Churchill and NIG, had looked increasingly unlikely in recent months as a string of potential trade buyers, including Zurich and Allianz, distanced themselves from a possible deal.

The only name still publicly linked with RBSI is Allstate, the US insurer, which is believed to have tabled a bid.

But as pressure increases on RBS to shore up its balance sheet, a spokesman insisted sale talks were continuing.

“We are in advanced stages of discussions with a couple of interested parties,” he said.

But the spokesman refused to provide further details.

RBS initially put a £7bn price tag on its insurance business when it put the division up for sale in May. It is thought, however, that the company may now have to accept less.

RBS received the taxpayer’s support today following a disastrous fall in its share price. The government will take a majority stake in the bank, buying £5bn of preference shares and underwriting £15bn of ordinary shares.

The RBS chief executive, Sir Fred Goodwin, has resigned, and the bank’s chairman, Sir Tom McKillop, said he would step down next April.

Stephen Hester, former chief executive of property developer British Land, is to replace Goodwin. McKillop’s successor has not been announced.

A further £17bn of public money will be injected into HBOS and Lloyds TSB. Barclays has announced plans to raise £6.5bn without government help.

Under the terms of the Treasury’s package, executives will not receive bonuses this year and the institutions have agreed to continue to offer credit to homeowners and small businesses.