Worry over Pru and Aviva as FSA offers to ease capital rule

A note from Goldman Sachs said Prudential and Aviva may be forced to write off assets because of their exposure to declines in the stock market and in corporate bonds. The Pru lost 65½p to 304½p and Aviva was off 39p to 353p.

The insurers insisted their capital positions are strong.

The Goldman note raised talk that Pru and Aviva will merge, which they have tried to do at least once before.

This speculation came as City watchdogs offered to lower capital requirements for life insurers in an attempt to avoid a major failure in the industry and prevent a run on the stock market.

The Financial Services Authority wants to avoid a repeat of the scenario in the last stock-market slump when insurers battling to keep solvency ratios high were forced to sell billions of shares. As the market kept falling, they had to sell ever more stock, damaging the performance of the funds they manage for private investors and pension funds.

The move is raising eyebrows amid fears the insurance sector could be the next victim of the financial crisis. One senior insurer said: "It's a funny time to be saying 'if you can't meet capital requirements, that's OK by us'."

The FSA says the insurance industry is much stronger than it was at the start of the decade, a point with which analysts agree. It adds that it is taking a "pragmatic approach" following discussions with the Association of British Insurers. Insurers who fear they may breach capital requirements may be allowed a temporary waiver until markets settle.

Independent insurance analyst Ned Cazalet said: "Having very tough rules can mean people are triggered into doing things that create their own problems. We are in a better place than we were a few years ago and it is right to take a pragmatic approach, as long as the supervision is clear."