Millions of people who invest in life insurers through their with-profits pensions, endowments and bonds will have been concerned by the news last week that the Financial Services Authority (FSA), the City watchdog, has been forced to boost its team monitoring the industry.

Aviva, owner of Norwich Union, said in its trading update last week it had seen an increase in calls from worried policyholders as the credit crunch has spread from banks to insurers, and the sector has seen shares plunge 31% since July.

The Bank of England is worried enough to have raised the issue in its Financial Stability Report. It said insurers that suffered heavy losses could be at risk of a downgrade by ratings agencies, triggering a crisis. Fitch, the credit rating agency, downgraded its outlook on global insurers from stable to negative last month.

UK insurers’ shares rallied at the end of the week, however, after Aviva, Standard Life and Friends Provident all moved to reassure their customers.

Advisers said they were inundated with calls from worried policyholders, while the Association of Policy Market Makers, which buys and sells second-hand with-profits policies, said that inquiries had risen 12% year-on-year.

Andrew Fisher of adviser Towry Law said: “I don’t think we’ll see a large insurer collapse but there is a strong likelihood of another round of consolidation.” There are also concerns that the declining value of corporate-bond investments could cause big cuts to annuity rates.

Aviva

Stock-market falls over the past three weeks have wiped £600m off Aviva’s surplus, though it was still a relatively healthy £1.3 billion last week. A further 20% drop in equities would reduce that by another £400m.

Standard & Poor’s, the ratings agency, affirmed its AA- credit rating of Aviva and its subsidiaries describing the group’s capital as “very strong” and its outlook as “stable”.

However, there are fears the planned reattribution of Aviva’s inherited estate, worth an average £1,000 per policyholder, may not go ahead.

Dominic Lindley, of Which?, the consumer group, said: “Norwich Union has now left policyholders dangling. After luring them to stay in the fund with the talk of payments from the reattribution, it is saying it is considering renegotiating the agreement, cutting the payments to policyholders and has slapped massive transfer penalties on many customers.”

Standard Life

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