Analysis
By Stefan Armbruster BBC News Online business reporter

As the insurance industry struggles to remain solvent in the face of falling stock markets, some of the firefighting measures could spell further trouble.

Continued uncertainty over the US economy, a looming war on Iraq, poor corporate earnings forecasts, high oil prices and recent accounting scandals have created the biggest bear market in decades.

They have been selling and they're not helping the market

Ned Cazalet, insurance analyst

Traditionally, UK insurers have held about 70% of their assets in the stock market.

But more than 20% has been wiped off the FTSE 100 in the last 12 months alone.

The falling markets have erased the insurers' capital base, needed for them to continue to pay out on policies and compete for new business.

"At these levels they are suffering a great deal of pain," Ned Cazalet, an independent insurance analyst who advises many of the UK's life assurers, told BBC News Online.

Spiral effect

Insurers have closed some products, cut payouts and imposed redemption penalties to stop investors further depleting their reserves.

They have also been selling off their stock portfolios, further pushing down the markets, in a vicious cycle of selling.

Their goal is to raise cash and to swap into bonds, at a time when the markets are already plumbing six-year lows.

"The insurance companies still have a lot of money in shares, but the question is still 'do they have too much?'," Mr Cazalet said.

"They have been selling and they're not helping the market."

Europe-wide the industry is also seeking to raise about $10bn (�6.4bn) through stocks and bonds issues, further diverting any scarce cash that could boost the ailing stock market.

UK insurers 'okay'

On Tuesday, the regulator of UK's life assurance industry said that firms should be able to withstand further sharp falls on the stock markets.

In a report on the sector, the FSA helped allay fears that plunging share prices could push one of the UK's big insurers into bankruptcy.

"In practice, firms need to hold assets... in order both to absorb unexpected losses and liabilities and to support future new business," said John Tiner, managing director at the Financial Services Authority (FSA).

"The survey confirms that the insurance industry does indeed hold such excess assets."

The assessment, though, was performed when the FTSE 100 was at about 4,000. The index closed on Tuesday at below 3,800.

"It's not a reassurance," Mr Cazalet said of the FSA's findings.

"The regulator means that these companies are not bust but it does not mean the industry is in good shape, it just means it hasn't expired," he said.

The FSA did cast doubt on the industry's financial reporting and recommended stricter policing of the solvency requirements.

The industry has reportedly told the FSA that it faces a serious solvency issues should the FTSE fall through 3,500.

Insurers squirm

The impact of the falls has been graphically illustrated by Australian insurer AMP.

Last week, AMP's chief executive resigned in the wake of solvency problems at UK life business Pearl, into which the parent group has pumped �500m to keep it solvent.

Every 100 point fall on the FTSE cuts �120m off Pearl's capital reserves and it has admitted it might need more cash if the market falls below 3,700.

On Monday, Europe's biggest mutual insurer Standard Life cut policy bonus payments and imposed exit penalties on policy holders wishing to cash in their savings early, joining its UK rivals to prevent a run on funds.

The most troubled UK insurer, Equitable Life, has reportedly cut its equity exposure to 5% of its �15bn investment portfolio from about 25% in May, in a bid to stay solvent.

Munich Re, the world's largest re-insurers, on Tuesday also announced it would prop up its US subsidiary, American Re, with a capital injection.

Cashing in

Other insurance groups are planning to raise billions in rights issues and share placings to restore their depleted capital and prepare for "vulture" takeovers of troubled rivals.

While this will cover their short-term problems, it will do nothing to help the stock market.

"They are a drain on the market but it's not going to kill it," said Mr Cazalet.

"Investors will be sceptical of the reasons why they should buy these," he said.

Swiss Life on Tuesday announced a plan to sell up to 11.75 million new shares worth about 1.2bn Swiss francs (�519m; $786m).

September has witnessed a wave of insurers wishing to tap the markets for more capital led by Legal & General which is seeking �786m to fund an expansion.

Others include Zurich Financial, Aegon, Brit Insurance and UK specialist insurer Hiscox.

Britain's Royal & Sun Alliance has off-loaded its chief executive in preparation for a rescue share issue expected to total up to �1bn.

German giant Allianz, France's Axa and the UK's Aviva will also possibly need fresh funds.

All the signs suggest that until the markets steady, insurers will remain trapped in a deadly spiral as they fight to prop up their reserves.