The UK's Financial Services Authority has moved to shore up the stock market by easing regulations for insurance companies.

It has relaxed its solvency test for insurance companies - in a move which it hopes will help stabilise the share market by making it less likely that they will have to sell shares in a falling market.

Insurance companies are some of the biggest holders of shares in the UK, and can strongly influence the market.

Shares in insurance companies have risen on the news, as many had felt the existing test had encouraged insurance companies to continually sell shares to meet the regulator's requirements.

CGNU chief executive Richard Harvey described the decision as "a sensible move in volatile markets," he said.

Under the old test, the FSA required insurers to have enough money to withstand a 25% fall in share markets from their current levels.

Stress test

However, falling shares can encourage insurers to put their money into more stable assets, such as bonds.

Insurers hope that this will protect them from further falls but insurance companies are such big players in the UK markets that this can result in a downward spiral of share prices.

The new test allows insurers to take into account previous share falls when meeting in the test.

If the stock market is currently 10% lower than the average over the past three months, then insurers need only test their portfolios against a fall of a further 15%, rather than the current 25%.

Shares in insurance companies have surged on the news, with shares in Prudential 6.25% higher at 595 pence and shares in CGNU 5.8% higher at 520 pence.

"It's quite a significant move, and it takes some of the pressure off the insurers," Commerzbank insurance analyst Roman Cizdyn said.

Last year, the FSA suspended its resilience test twice, following market turbulence.

The FSA has already warned that many smaller insurance companies may "wither on the vine," while the Bank of England's Financial Stability Review also highlighted the "weakness" of the insurance sector in the light of equity market falls.