New rules could see insurers relocating outside the EU

And the survey, by business advisers Deloitte, also reveals that UK insurers are failing to prepare sufficiently for the European Union Solvency II regulations, which could mean some firms having to relocate.

Under the rules, which come into force at the end of 2012, insurers will have to hold sufficient capital to meet the risk on their balance sheet, restricting allocations to riskier asset classes.

But a third of UK insurers are not confident that the industry will be ready for the legislation, with 38 per cent of company boards still not fully briefed and 61 per cent yet to have budgets approved for Solvency II implementation. Of those, one in five have not yet compiled their budgets.

The report also claimed that some 11 per cent of insurers may have to move their business outside the EU as a result of the Solvency II regulations.

Rick Lester, lead partner of the Solvency II team at Deloitte, said the extension of the deadline to 31 December, 2012, announced last week, did not relieve the urgency for insurers to prepare.

"Further, 11 per cent may have to relocate their business, which is a very significant finding that will have broader consequences beyond the insurance market," he said.

"It has always been predicted that Solvency II could lead to re-domiciling, but if UK-based insurers leave, it will also have ramifications for employment and taxation levels in Britain."

Lester said that with 2012 having long been on the horizon for insurers the industry should be better prepared by now.

"While many insurers await more detailed advice and are continuing to actively lobby the ABI and FSA, they should by now have more robust plans in place with regard to budgets and resourcing."

A recent broker note from Goldman Sachs claimed that while the Solvency II rules would not significantly alter the amount of capital that insurers hold, the legislation would create instability for insurers over the longer term.

The legislation is already affecting investors in the form of lower annuity rates. Annuities are largely backed by corporate bonds, but under the Solvency II rules companies investing in corporate bonds will have to hold additional capital reserves from 2012.

As a consequence, annuity providers are likely to reduce exposure to corporate bonds in favour of gilts, thus reducing the funds with which they can pay out on annuities.

Axa has already pulled out of the enhanced annuity market citing the effect on Solvency II as the prime reason, while the rules are also the major factor in Aegon's annuity rates becoming markedly less competitive.

Some insurers predict that the impact of the legislation on annuity rates could be as much as 20 per cent.