Some life insurance firms could struggle for survival under the pressures of new regulations and a challenging economic environment, according to a report by accountancy firm Deloitte.

And the public could soon find that levels of product choice begin to diminish.

The report, 2005: UK Financial Services at a

Watershed, looks at the impact of regulation on banking and life insurance markets and is based on a survey of leading financial institutions.

Deloitte says an avalanche of regulatory initiatives and new business economics is poised to change the face of UK retail financial services over the next 3-5 years.

The report notes that making the transition to the new financial landscape will require capital and Deloitte argues that some firms, notably the larger institutions and particularly the banks, have a distinct starting advantage.

Critically, the larger firms have economies of scale, cheaper regulatory capital and the diversity to be able to shuffle their business portfolios. Some niche players will benefit from their focus and ability to move swiftly. Larger insurers need to capitalise on their customer relationships.

Of all types of financial services firm, Deloitte predicts the prospects for smaller to medium life insurance companies will be the least rosy. One of the key concerns is that the impact of regulation disproportionately increases the cost base for the smaller firms.

Chris Gentle, the report author and head of financial services research at Deloitte, said: "Adapting to a regime with lower margin products and longer pay back periods will be a drain on capital for all types of financial services firm."