Hector Sants, the FSA chief executive, has admitted the "considerable" costs of implementing Solvency II may outweigh the short-term benefits to the industry.
In a Keynote address, Sants said there would be "winner and losers" as a result of the directive, but he stressed roll-out costs were likely to impact small firms in particular.
This was mainly because diversifying business lines - more common in larger businesses - was likely to attract a lower capital charge, he said.
"When looking at the short-term costs and benefits [of Solvency II], particularly in the context of an implementation bill for industry which will be considerable, it is debatable that for the industry as a whole the benefits will outweigh the costs for UK firms," he said.
The FSA has already estimated its implementation costs alone are likely to hit £100m, and it must publish the results of a UK-wide cost-benefit analysis within the next 12 months.
Sants said it will be over the longer term that Europe would start to see the benefits of Solvency II, particularly in three areas.
He said an enhanced prudential regime for insurers will provide greater policyholder protection, create a "harmonized" regime across Europe and raise standards in non-EU countries.
Meanwhile, Sants said Solvency II, set for full implementation on 1 January 2013, is necessary because the insurance industry was partly responsible.
"It is well recognised that the main problems in the crisis lay in banking, investment banking and ‘shadow banking'," he said.
"Nevertheless the insurance industry was not an entirely innocent bystander, and there are lessons to be learned from the industry's perspective."
