Insurers must hold their nerve and avoid succumbing to the approaching soft premium cycle, the FSA has warned.
Speaking at the Institute of Economic Affairs, FSA insurance firms division director David Strachan said that the motor market was beginning to soften due to the entry of new capital into the market and significant undercutting of prices by some insurers.
Property and casualty classes would follow, he said.
Strachan warned that a return to soft market conditions would cause "greater financial stress" than normal and that it was up to underwriters to protect themselves.
"Many firms have not fully repaired the recent damage to their balance sheets and no longer rely on solid investment earnings to offset increased underwriting losses.
"Some insurers manage to maintain underwriting discipline throughout the cycle, avoiding the worst excesses of price cutting. Their results across the cycle speak for themselves."
He also said that firms needed to "impress upon their staff on the need for financial discipline" and to "take a long hard look at their cost base".
Insurers acknowledged that the motor market was on a "knife edge".
Zurich head of motor underwriting Dave Swann said: "The market seems to be holding at the moment. But there is always a possibility that some insurers will drag it down.
"The pressure will probably come from the bancassurers. We will have to wait and see."