Britain’s Financial Services Authority has relaxed rules dictating how insurers invest their money to avert a wave of selling that threatened to accelerate the fall in share prices since the attacks on the United States.
Under the old rules, insurers had to take a very conservative view of their investments. This forced them to offload shares when the market fell and switch into less risky bonds.
A plunge in the London share market on Friday prompted concerns insurers could be ditching equities to meet FSA requirements.
"We recognise that in current unusual market conditions further steps are necessary to avert the need for some insurance companies to sell equities for short-term technical reasons in a way which could be damaging to the interests of their policyholders," an FSA statement said.
The FSA had already eased these guidelines slightly just before the US attacks and was keeping an eye on the situation last Friday when the London market fell steeply.
Life insurers have to comply with regulations that seek to maintain the financial health of their life insurance funds. They have to ensure the funds have sufficient assets to meet liabilities - pensions and life insurance payouts.
The FSA's move is designed to stem massive selling by insurers to comply with these rules in the face of falling share prices.
The fear is that this could drive the market down even further, triggering more sales of equities as insurers are forced to reduce equity holdings even more and switch into less risky investments.
Life insurance shares have fallen by around 30 per cent in the wake of the US attacks, partly due to fears about the impact of falling global equity markets on their life insurance funds.