New European Union rules for insurers — due to take effect in 2012 — could drive some British insurers into Bermuda's arms.

One UK insurance giant, Legal & General, is already considering a move out of the UK because of the Solvency II directive, according to a report in the London-based Sunday Telegraph newspaper, and Bermuda is one of its options.

Asked about concerns over a potential exodus, Malcolm Tarling, a spokesman for the Association of British Insurers (ABI), told the Telegraph Solvency II "must be changed to a form that is right for the UK insurance market, to ensure it doesn't get to that stage".

The ABI had previously warned in a letter to UK Chancellor of the Exchequer Alistair Darling that the "extreme" EU plans could raise the capital and reserve requirements of British insurers by up to £70 billion ($114 billion), leading to rights issues across the sector.

Mr. Tarling said the proposed European regulation was still a live issue and that the ABI was "working towards getting it right". He added: "There is a lot of work that we're doing on Solvency II – it is very much an active issue. There is quite a way to go, we want to get the directive in a form that is right for the UK insurance market and our members."

The Telegraph reported: "Should the directive go ahead unchanged, Bermuda has been cited as a possible relocation destination."

Legal & General (L&G) is a 173-year-old London-listed company. Its plan to move would be made over the longer term and would not involve removing the bulk of its staff to a new destination, according to the Telegraph's source.

Under the Solvency II proposals, annuity providers like L&G would be hardest hit as they would need to match liabilities to bond yields. They fear this will increase the volatility of their balance sheets and force them to raise capital levels.

During L&G's half-year results presentation in August, Tim Breedon, the insurer's chief executive, said the regulation would represent a "betrayal of savers", if it was introduced in its present form.

He said that the value of UK pension savings could be cut by up to 20 percent as companies passed on the costs to pensioners in the form of lower incomes.

In a newspaper article last week, Mr. Breedon wrote: "The risk now is that competition between regulators – at the national, the EU, and broader international levels – will simply bid up the amount of capital the sector is required to carry to levels which are unnecessarily high and which prevent us from doing business.

"Capital is a raw material we use in the manufacture of our products. If more is needed, prices go up, and value for the customer is eroded."

Insurance regulator the Bermuda Monetary Authority has been enhancing its own rules to achieve "mutual recognition" — for its regulation to be considered the equal of the Solvency II by 2012 — to ensure that Bermuda-based re/insurers doing business in the EU are not competitively disadvantaged.

The BMA has strong support from the industry in Bermuda in strengthening its regulation.