The last few days have seen very low gilt yields, with swap rates moving down as well - one of the measures in the FSA regulations for calculating life insurance liabilities is the 15 year gilt yield (taken from the FT). This has been moving as follows:

31 Dec 2008 = 3.71%
31 Dec 2009 = 4.40%
30 Jun 2010 = 3.89%
31 Jul 2010 = 3.92%
23 Aug 2010 = 3.58%
24 Aug 2010 = 3.47%

For life insurers writing with-profits business, liabilities will tend to follow the value of the underlying assets until any guarantees (minimum sums assured, death benefits) start to be in excess of the value of the underlying assets backing WP policies. The projected excess amounts will be discounted at a gilt-related rate, so falls in gilt yields will tend to increase liabilities with no corresponding change in asset values.

For annuities, life insurers tend to be invested shorter than the liabilities (annuities are payable for the next fifty years - there aren't many assets paying income for this long). This means falling bond yields will increase liabilities more than the assets have increased in value.

For pricing of annuities, falling bond yields will increase the price and make annuities less attractive (both for individuals and for buy-outs).

Looking forward, "Solvency 2" will exacerbate these impacts as the liabilities calculation is a bit more "market related" than at present (with less of any bond credit spreads being allowable in the rate used for discounting liabilities).

Somewhat bizarre that the prices of life insurers are holding up so well in the last week.