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Most of what they have had to face is not new. What is new is that a whole series of events classified as possible but not probable have happened together, which together represent the death knell for life assurance as a savings medium. Consider some of the risks that life companies have recently been exposed to:

Counterparty risk

This arises when you rely on another party to fulfil your own obligations. Readers will be all too familiar with out sourcing of administration. You telephone a UK number with a query and, with wonders of modern technology you are greeted by someone in India with a hybrid alliterative name such as Peter Patel or Sally Shah. Sometimes it is a UK call centre. Either way, the life company is relying on another company to discharge its service obligations to its customers. If the third party fails because of the credit crunch the activity has to be taken back, which requires tooling up again; or the third party has to be bailed out. If the third party is a non-UK organisation then the financial arrangement between the two parties would be subject to currency risk. This could work to the life company's advantage or disadvantage depending upon how the exchange rate moves. Of course if the third party suffers too big a financial hit then the life company might suffer one way or the other.

However the real counter party risk lies in the complex financial transactions that have mushroomed over the past 20 years. The use of swaps and derivatives has become commonplace. It first started in the early 1990s when a fall in bond yields meant that guaranteed annuity options came into money. Investment banks came up with products which attempted to match the cash flow requirements. Sometimes a better rate could be obtained if the asset was in euros. If so, the income stream in euros would have to be swapped for a sterling stream. These assets carry a market value and daily changes in them are 'marked to market'.

Lehman was a relatively big player but is no longer trading. Life companies who had assets with them will have suffered a significant loss. Other writers of these contracts, for example Goldman Sachs, are still around, but their credit quality needs to be reassessed. If this resulted in a reduction in the value that can be placed on its product then the life company's balance sheet will take a hit.

Life companies that are likely to be affected are those with guaranteed annuity option liabilities and those who have written, for example, guaranteed equity products.

Re-assurers are another source of counterpart risk and need to be vetted carefully.

Corporate bonds

Corporate bonds could be badly hit if their issuers were hit badly by the credit crunch. Spreads could widen, reducing the price of such bonds. They could also become less liquid if investors become reluctant to buy them. Old Mutual has extensive exposure to these in the US - as did Jackson National, Prudential's US arm and also Aegon's US arm - because they have large blocks of guaranteed investment products. I suspect that some of the loss is permanent as the market will not again take such an optimistic view of credit quality as they did in the recent past.

Companies that write substantial volumes of annuity business will also be on the watch list. Many exotic products have been developed by investment banks to provide better matching and/or lower cost. The credit worthiness of the writers of such products would need to be urgently reviewed. If their creditworthiness is reduced then the value of the assets needs to be written down. Companies such as the Prudential, L&G and Aviva as well as the new bulk annuity providers should be reviewed to see if they are affected.

Equity prices

From a recent peak of about 6300, the FTSE fell to about 3700 and is currently standing at 4400. Such volatility gives the yo-yo a bad name. Life companies have to test for further falls no matter how low the index has already fallen. In 2000-2001, inability to withstand it caused many life companies to sell equities at the bottom of the market instead of buying them. FSA were widely criticised for causing this to happen. This time they have been less dogmatic.

The problem is that if you give some freedom when the index is at 3700 and it then falls to 3500 or even 3250 where does that leave the regulator? Asleep on the job would be one of the kinder verdicts. Consumer journalists have the luxury of hindsight. Regulators are supposed to have perfect foresight.

They do not and neither do life companies' management. Criticism of the reappearance of the market value adjuster has resurfaced. It is essential although care must be taken to ensure that customers are treated fairly. However the real issue is more fundamental. Is it possible in modern conditions to have a long-term investment vehicle that can provide a smoothed investment return? The equity market has become very complex. Not only is it a primary market but also a secondary (derivatives) and even a tertiary market (hedge funds). It is not easy to disengage the actions of each. But we know the net effect is that over the past 10 years the UK equity market has shown practically no growth but there has been wide fluctuations. There are tremendous possibilities for short-term gains (or losses) but as a long-term vehicle it has been a pup. What chance then of running a smoothed investment vehicle?

In conclusion, a trusted friend that has served the country well for two centuries ought to be put out to grass. Where does that leave the with profits life companies, giants such as Aviva and the Pru as well as minnows such as Wesleyan? They can use the inherited estate to treat customers fairly as it winds down its with profits business. I note that the Prudential has abandoned plans to distribute its orphan assets? Perhaps they were not really orphans. Some of it is to cover extreme unlikely events.

But if there is no future in with profits what is the prognosis for life companies as a savings medium? Poor, as unit-linked products are tax disadvantaged compared to unit trusts and Isas.

Contagion risk

This has been the biggest risk of all. Companies can do sensible things but they cannot insulate themselves from the real world. In this instance the FSA clearly did not read the signals. It is really up to the regulators to have the eye of the eagle not just those of an insect. But the sad thing is that in a free market companies must be allowed to fail to purge the system. Life companies are expendable, so Equitable Life is allowed to fail. Banks are a different matter. But why?

Finally one useful lesson for investors. Stay clear of large conglomerates - they are hard to manage - and avoid companies that dabble outside their area of expertise.

Icki Iqbal is a former director of Deloitte