It has written to chief executives of 250 life companies inviting them to apply for a waiver from current solvency rules.

It is hoped that the move will prevent life firms from being forced to sell shares, driving prices down.

In addition, the move will allow the watchdog to monitor the financial health of firms on a case-by-case basis, helping to avert a repeat of the Equitable life debacle.

Market falls

At present the FSA requires life insurers to hold enough assets - such as shares, property, bonds and cash - to cover liabilities to investors.

But three years of sustained stock market falls has eroded the balance sheets of all insurers.

Back in February the UK's largest mutual life insurer Standard Life asked the FSA to relax its solvency requirement.

At the time it was rumoured that other major insurers were set to follow the Standard Life lead.

But the FSA has relaxed solvency requirements in the past.

Demonstration

Back in January insurers were told they would no longer have to meet a benchmark known as the Required Minimum Margin (RMM).

This had specified the value of their investments had to be 4% greater than their liabilities.

The move was designed to prevent insurers from dumping large volumes of shares to maintain regulatory levels of solvency, which had made heavy stock market falls worse.

The 23 page letter sent by the FSA on Thursday says that the watchdog would like to move to a more "realistic" measurement of life insurers finances.

However, the letter adds that whatever the new calculation firms will still have to "demonstrate to us that they are holding sufficient financial resources to meet expected liabilities".