The Financial Services Authority is assembling a team of outside advisers to deal with a possible wave of corporate crises in the insurance sector.

The regulator and government departments are also looking at a range of options to assist insurers, including relaxing rules on accounting and capital requirements.

The FSA appointed an external team of lawyers this week after presentations by about ten firms two weeks ago. Sources close to the process said the regulator was trying to ready itself for a surge in restructuring or failures among financial services companies.

The appointment process has been going on since January, according to a source close to the FSA. One lawyer involved said that presentations had centred on insurance sector failures.

A source said: “This thing has developed a life of its own. It’s all about ensuring the FSA has external advice in place in case something goes very wrong.”

Sources said that the Government was considering changes to the regulatory regime that would be implemented if the stability of the insurance sector was further threatened by falls in the price of equities and corporate bonds.

The Bank of England and the FSA are known to be watching the insurance sector carefully for signs of stress. Although the Government is still some way from pressing the button on an intervention, sources said that the FSA and others were monitoring the fast-moving situation closely.

On Monday the Bank said that insurers did not share banks’ extreme liquidity problems, but added that downgrades by credit ratings agencies could undermine their stability, forcing them to sell assets.

Sources said that the Government was keen to avoid the vicious spiral of forced selling that that would generate in already depressed share and corporate bond markets.

One way to relieve pressure on insurers would be to relax FSA rules on how much capital they need to hold. The regulator would normally run a consultation process before altering the rules but in an emergency could make a change unilaterally, as it did on short-sellers of financial stocks.

The FSA could also press for suspension of mark-to-market accounting for insurers, which forces them to value their assets at market prices. In falling markets that creates a problem for insurers, some of which, particularly in life insurance, argue that they hold assets over many years and should not be forced to value holdings when prices are extraordinarily low.

The one bright spot for the sector yesterday was Aviva. The insurance giant appears to have quelled market concern about its stability and its shares closed up 5.61 per cent at 259p.

Andrew Moss, Aviva’s chief executive, said: “There should be no doubt about the strong capital and liquidity position of the group.”

However, even Aviva has been hit by falling asset values and its capital buffer has fallen from £1.9 billion in September to £1.3 billion. The company said, though, that even if another 20 per cent was wiped off the stock market it would retain a buffer of £900 million and that it had not asked for, and did not intend to seek, any financial assistance. Other insurance shares continued downward. Legal & General slid 12 per cent to 60.9p, Prudential fell 10 per cent to 248¼p, Old Mutual dipped 8 per cent to 39p and Standard Life lost 6.8 per cent at 177p.

Aegon, the Dutch insurer employing 4,500 people in the UK through Scottish Equitable, received €3 billion (£2.3 billion) from the Dutch Government to bolster its capital base.

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