The UK's biggest insurers will be hit by expensive solvency rules likely to add to upward pressure on rates.

The EU financial groups Directive will bring in an additional solvency test for big financial groups.

The international financial conglomerates it is aimed at - those with insurance, banking or investment arms - could have to raise billions of pounds of new capital. The ABI played down reports that the industry would need £4bn to comply.

The figure was reached after the FSA said the annual cost to the UK's 90 insurers would be £134.3m.

This implied a total cost of £3.8bn to £4bn at a cost of capital of 3.5%.

But an ABI spokesman said the sums were based on "a very complex set of assumptions that need to be assessed".

"We think [the £4bn figure] may be slightly on the high side, but it is a very complex document and it may take some time to give a more precise figure."

In particular, the ABI believed that some companies may already have raised some of the extra capital required.

The eventual cost will need to be met when the rules take force on 1 January 2005. The expense of raising extra capital will add to pressure felt by insurers to keep rates high.

The ABI plans to set up a working party and consult its members over the Directive. Insurers have until early next year to respond.