The financial health of the UK's biggest life insurers has worsened over the past year according to new research.

The falling stock market has eroded the prosperity of the sector to such an extant that some companies only just have enough assets to cover all their liabilities.

The Centre for Risk & Insurance Studies at the University of Nottingham said the level of assets top UK insurers would have left after meeting all liabilities, known as the free asset ratio, has fallen from 9.6% to 6.6% during 2002.

What is more, the free asset ratio for insurers had fallen from an average of 22.5% back in 1999, at the height of the stock market boom.

Financial engineering

Many life insurers have been forced to cut bonus payouts to policyholders, as a result of worsening finances.

Policyholders often rely on these investments to pay off their mortgage or provide a retirement income.

But Chris O'Brien, director of the centre and author of the report said that, despite falling bonuses, policyholders had still generally fared better during 2002 than if they had been invested in the stock market.

Insurers have been able to ride out some of the worst falls in the stock market by spreading investments between a range of assets such as cash and bonds.

In addition, according to the research, leading insurers had indulged in "financial engineering" such as including future profits to keep levels of assets above liabilities.