Overzealous FSA regulation could damage the UK economy, insurance chiefs have warned. It is understood that at least one major general insurer is considering transferring capital out of the UK in response to the FSA's proposal that general insurers trading in the UK will need to hold two times more capital than their European counterparts to prevent insurer insolvencies.

The FSA released CP190: Enhanced capital requirements and individual capital assessments for non-life insurers, in July. Leading insurers say that as the proposals in it are super-equivalent to the EU regulations on which they are based, insurers who avoid these regulations by trading in the UK from a base elsewhere in Europe will have a competitive advantage.

One insurance chief executive said: "The whole idea of this regulation is to standardise trading on a European basis, but because the FSA, on CP190, has gone further than other foreign regulators, I know of companies that are actively out looking and say they could write business in the UK from a company that is no longer in the UK, because they won't require as much solvency as the FSA.

"That could be really damaging to the UK economy."

An FSA spokeswoman said that under the EU's 'passporting' arrangements, the FSA could not prevent an insurer regulated in another European country from trading in the UK provided the country belonged to the European Economic Area. But it has defended its proposal to impose higher solvency requirements. In the consultation paper it describes the capital levels in the current EU Directive, which dates back to 1973, as "too low and not risk-sensitive".

It goes on to describe the increased capital requirements in the new EU Directive, due to be implemented in 2004 as "modest". But new FSA chief executive John Tiner says the tough measures are primarily due to failures in the London Market. "While there have been very few failures among UK general insurers in the retail market, the failure rate among London Market insurers over the last 20 years has been too high," Tiner said.

According to another industry source, a "top 10" UK general insurer is currently considering the feasibility of moving "a big chunk of capital" to Gibraltar before the end of the year to avoid the solvency regulations.

Under the proposals in CP190, general insurers will be subject to a risk-based enhanced capital requirement, based on capital charges to be applied to asset and insurance risks, as well as an individual capital guidance, based on the FSA's view of the amount of capital it considers adequate for each firm to hold, taking into account the insurer's assessment of its own capital needs.