City watchdog the Financial Services Authority said life insurers could handle further stock market falls without facing insolvency.

The regulator said firms had a significant ability to withstand more large falls in equity values, based on a survey of the UK's 20 biggest life insurers carried out when the FTSE 100 index was at about 4,000.

Insurers were asked to assess their future liabilities on a "realistic basis", taking into account future bonuses they would have to pay out and predicted investment returns.

John Tiner, managing director of the FSA's insurance directorate, said: "In practice, firms need to hold assets well in excess of these best estimate liabilities in order both to absorb unexpected losses and liabilities and to support future business.

"The survey confirms that the insurance industry does indeed hold such excess assets."

The FSA declined to comment on what level the stock market would need to fall to before firms faced difficulties, though it added that the level would be different for each.

The news came as the regulator launched its new approach to insurance regulation following a 12-month overhaul of the system under the Tiner Project, set up after the problems at Equitable Life.

During the past year the FSA said it had recruited insurance specialists, built up more pro-active relationships with firms and visited their premises to see how they ran their businesses.

It said it was adopting a risk-based approach to regulation, focusing on firms where there was a higher probability of failure or whose failure would have the biggest impact on consumers.

It added that it was also demanding more openness from firms and had made senior management responsible for ensuring their company met its regulatory requirements and informing the FSA if it did not.

Mr Tiner said: "This is clearly a challenging time for the insurance industry worldwide. We are ensuring that the UK's regulatory regime is sufficiently robust and flexible to cope with changes."