Ask anyone in the industry how N2 (as the new regime is known) will affect their lives in the short-term and the answer is the same: the jury is still out. Many observers believe it is only the start of the regulatory review, while others worry its scope will be limited and its application fudged.

The Financial Services Authority's (FSA) new powers are the most pertinent change. Only last week, FSA chairman Sir Howard Davies again had to defend the old regime against a fierce attack from the government's Treasury Select Committee. Companies like Equitable Life slipped through the net due to a lack of resources, he said. But today the FSA has the staff and systems to monitor the industry in a more forensic manner, he added.

The FSA now holds its own internal reports on the reserve levels each insurance company needs to meet its liabilities. This is part of the risk-based assessment environment FSA insurance watchdog John Tiner wants to introduce and is the driving ethos behind N2.

Analyst David Wharrier of Fitch ratings agency feels the FSA compiled these reports as a direct reaction to high-profile collapses such as Independent Insurance. "It was a difficult one because if clever people want to go down the fraud line, then they will find ways to cover their tracks. The FSA will follow the

solvency and reserving of many of the companies in the industry, though one criticism is that the FSA's annual solvency returns have not been thorough enough," he said.

The new regulatory atmosphere mirrors that of the banking community, post-Barings (see page 20), which many senior insurance executives welcome.

Groupama Insurances chairman and chief executive Tony Lancaster says: "We should

be under no illusions. The new regulatory regime will be applied with a good degree of rigour and insurers will do well to ensure they are fully prepared. "

Meticulous book-keeping will not be enough. Under the new rules, senior executives are as liable for every poorly handled claim as the claims processing manager.

They are also responsible for the company's overall financial prudence and face massive fines or civil action if they are found wanting.

Solicitor firm Osborn Clarke says the regulations, particularly those focused on attacking fraud and money-laundering, will penalise smaller companies.

Partner Kieran O'Connor said: "This kind

of white-collar crime has been identified as being more prevalent among the SME market which the regulator believes will pilfer the pot more than the big boys.

"But this regulation is going to be extremely heavy for them and we think many will struggle or have to merge into large regional groups.

"Though you have to ask yourself, is a major drug smuggler going to try and launder his illegal cash by buying a 25-year pension or trust fund?"