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Life offices could close or merge as the markets slump and liabilities leap

Life offices are facing a financial crisis because of plummeting stockmarkets and soaring liabilities, meaning some could be in danger of closing to new business.

The FSA says the financial situation of the life industry is of concern and that it is keeping a “very close eye” on the sector.

A report from Cazalet Financial Consulting this week will show Friends Provident and Royal & Sun Alliance as just two of many companies to have taken big financial hits even before the most recent market falls.

Cazalet believes some life offices will be forced to close to new business or find a buyer if market conditions do not pick up.

The regulator has had to relax resilience testing further to ease pressure on companies to sell shares to meet the reserving requirements.

Friends Provident spokesman Jim Murdoch says: “We are alert to the volatile market situation and, like other insurance companies, we have contingency plans which we have followed.”

R&SA spokesman Paul Atkinson says: “Recent volatility in worldwide markets has created challenges for us all. Our customers should be assured that we are taking necessary steps to ensure our operations are adequately funded and well managed.”

FSA spokesman Vernon Everitt says: “There are always some companies that we are keeping a closer eye on than others and we continue to monitor the sector very closely.”

Cazalet Financial Consulting principal Ned Cazalet says: “These falls are very painful for life offices. While companies are not commercially insolvent, the ability to pay bonuses and to smooth payouts has been greatly diminished. A number of companies will close to new business or will have to find buyers if current conditions persist.”

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