Growing concern over whether UK insurers will scrap dividends hit shares on Friday amid fierce debate over whether regulators should step in to force their hand.
Legal & General (L&G), Aviva, M&G and Phoenix fell between 5% and 7% after EU regulators said insurers on the Continent should halt dividends.
Although the UK insurance sector is regulated separately by Bank of England, there is concern the EU move may put pressure on UK insurers to cut.
Lenders like Barclays and HSBC have already been forced by the Bank to halt dividends after its “raised eyebrow” approach failed to stop planned payouts.
Insurers have faced similar mood music but have not been told to cut.
Prudential Regulation Authority (PRA) chief Sam Woods wrote to insurers’ boards on Tuesday telling them to be “prudent” with dividends and bonuses and look after policyholders — but some say stricter words are needed for insurers to cut.
“If L&G cuts and Aviva doesn’t then L&G gets crucified," said one industry observer. "They can’t act independently. They need to go as a group and it’s easier to go as a group if the PRA forces you to do it. It gives them cover."
Forcing a cut, however, may undermine capital buffer rules known as Solvency II, which were introduced by the PRA to make sure insurers are strong enough to withstand disasters.
Insurers are currently strong enough to pay dividends due to the rules, so forcing them to cut anyway would call into question Solvency II.
The UK insurance sector is also a main contributor to the fund management income sector, which is relied on by millions of pensioners, and depriving funds of income could trigger wider problems. Companies could also face an investor backlash if they cut, further driving down share prices.
Analysts at UBS said they were "surprised" by the move by the European Insurance and Occupational Pensions Authority (EIOPA), the EU insurance regulator, to cut dividends because the sector is well capitalised.
EIOPA's call is only a suggestion to national regulators and Europe is split.
The Dutch regulator supports the idea but the German watchdog, BaFin, dismissed the idea saying a payout ban was not "necessary".
