The so-called Solvency II rules aim to ensure insurers such as Britain's Prudential (>> Prudential plc) and Aviva (>> Aviva plc) hold enough capital to honour policyholder commitments even when markets turn sour.

"The PRA believes the UK industry is in a good position," BoE executive director for insurance supervision, Paul Fisher, told a Westminster Business Forum conference.

"We are therefore not looking to use Solvency II as an opportunity to raise capital requirements across the board. We can’t and won’t gold-plate," Fisher said, dismissing suggestions Britain might implement a tougher version of the EU rules.

The UK insurance market was "probably about right" in terms of capital levels and the overall requirement will likely go down once Solvency II is fully implemented, Fisher said.

The new rules will be more challenging for the rest of Europe as "they will have to raise their capital levels" to close the gap with Britain, Fisher said.

"Hopefully it will close to zero," Fisher said.

Larger insurers will use their own models to estimate capital requirements and the BoE is faced with having to approve some 40 models by next January, compared with just 4 in Germany.

Fisher is focusing on approving the models of key firms first, suggesting not all will be vetted by January. "It shouldn't be a badge of honour to be there on day one, but for some firms it should be," he said.

LUNCH IN BERMUDA

Michael Wade, who advises the UK government on insurance issues, told the conference that the Lloyd's of London insurance market with its syndicates should compete on the quality of underwriting and seek to attract more foreign capital.

"It's not about a price war," Wade said.

Tax treatment of multi-year premiums being looked at by the government would help, along with changes to the regulatory culture.

"If you want to set up in Bermuda, you are offered lunch with the regulator and you are set up in a few weeks. That is not always the case in London," Wade said. Bermuda is a major competitor to Lloyds of London.

Fisher told Reuters the BoE maintains an appropriate approach to regulating firms.

"Having good regulation is key to a successful market in London. I don't think there is any inappropriate tone from us in doing that," Fisher said.

(Reporting by Huw Jones; Editing by Catherine Evans)

By Huw Jones