The Financial Services Authority (FSA) is expected to gain significant new powers as a result of changes to the supervision of the insurance industry, which could be outlined as early as today.

Solvency II, a European Union-wide insurance directive, could trigger a wave of consolidation among big industry players with a presence throughout the Continent, according to the Association of British Insurers (ABI). The new rules, which are designed to enable insurance companies to sharpen up, and limit, the amount of capital that they have to hold to cover their risks, should make it easier for insurers to get involved in cross-border mergers and acquisitions, Peter Vipond, the director of financial regulation of the ABI, said.

“In insurance, it is often difficult to extract value,” he said. “In principle, we would expect Solvency II to generate more M&A.”

Solvency II represents the culmination of five years’ work by the European Commission and national regulators across the European Union, including the FSA. The directive, which will replace the outmoded Solvency I, is expected to run to about 300 pages and cost up to €3 billion (£2 billion) to implement.

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In Britain it is hoped that the new rules will mean that there is no repeat of the equity-market-fuelled solvency crisis faced by insurers about four years ago. Internationally, the directive is aimed at making Europe able to compete more effectively with emerging economies, such as China. Under the new rules, the FSA is likely become a “lead regulator” for British-based insurers, such as Aviva.

Mr Vipond said: “There will be a single point of lead supervision, which will be where the company is head-quartered. Axa will be supervised out of Paris, Allianz out of Germany and, hopefully, Aviva out of the UK.”

Although it would still cooperate with other relevant national regulators, the City body would act as a focal point for British insurers to use when accounting for the capital efficiency of their continental European operations. About 4,000 insurers will be effected by plans covered by Solvency II.

Changes to be introduced will affect a raft of issues, from the way that insurers calculate the capital they hold to cover their assets and their liabilities, to the nature of their relationships with national and associated regulators. The implementation of Solvency II is expected in about 2011. Its regime will apply only to what is known as the “prudential” regulation of insurers. Complaints along product lines, such as over mis-selling, still will be covered by domestic regulators.

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