British insurance firms' finances are strong enough to withstand further stock market slumps, a report from the City regulator has said.

This is clearly a challenging time for the insurance industry worldwide

John Tiner, FSA

The report, from the Financial Services Authority (FSA), will help allay fears that plunging share prices could push one of the UK's big insurers into bankruptcy, triggering a financial crisis.

"On a realistic basis, life offices have significant ability to withstand further large falls in equity values," John Tiner, the FSA's head of consumer, investment and insurance issues, said.

The FSA's upbeat assessment is based on a survey of insurers' ability to meet their financial obligations.

The survey, carried out as part of an ongoing effort to overhaul the way insurance firms are regulated, suggests that the industry is holding enough excess assets to cover its liabilities, Mr Tiner said.

Exposed

Insurance companies, which invest heavily in the stock market to generate the cash they need to pay policy holders, have been hit hard by the recent slide in share prices.

London's benchmark FTSE 100 index, pressured by a slowing global economy, has fallen by nearly half from its December 1999 peak.

The decline has forced many insurers to retrench, reducing their equity investments and cutting payments to policyholders.

On Monday, mutual assurer Standard Life cut bonus payments and imposed exit penalties on policy holders wishing to cash in their savings early.

The move came in response to fears that large numbers of savers, unnerved by plunging stock markets, could try to withdraw their money.

Equitable shadow

Concerns over the health of the insurance sector have been growing since life assurer Equitable Life announced two years ago that it could no longer afford to make guaranteed annual payments to some policyholders, citing tougher economic conditions.

Earlier this year, Equitable struck a compromise deal with policyholders which saved it from collapse.

The FSA review of insurance regulation was launched partly in response to criticism of the way the watchdog handled the Equitable crisis.

The review is aimed at encouraging insurers to be more open with consumers and regulators.

"This is clearly a challenging time for the insurance industry worldwide," Mr Tiner said.

"We are ensuring that the UK's regulatory regime is sufficiently robust and flexible to cope with changes."