The Financial Services Authority has launched an inquiry into the effects of Hurricane Katrina on insurers as fears grow that a number face financial collapse.

Industry sources say that underwriters are expecting the biggest hit in history, far exceeding the $32 billion cost of the 9/11 terrorist attacks.

Several insurance syndicates operating in the Lloyd's of London insurance market are understood to have been badly affected, as well as a number of UK-registered groups based in Bermuda.

The FSA has written to insurers and reinsurers - groups which take on underwriting risks from primary insurers - asking for information about their liabilities and about the likely impact of Katrina on their solvency ratios - key measures which determine an insurer's ability to meet its obligations.

The letters, leaked to The Observer, show the FSA has acted swiftly to ensure there is 'no systemic risk' to the smooth operation of the industry following the hurricane.

Goshawk Insurance Holdings, a UK-listed reinsurer with Bermudian operations, is exposed to Katrina and is reported to be looking at ways of raising fresh capital. The insurance group wants to prevent ratings agencies from downgrading its creditworthiness, which could make it harder to attract business. Another insurer, Alea, has said it may have to put itself up for sale after an agency removed its A rating.

The FSA has also written to the London offices of the big European reinsurance groups as it tries to gauge the financial fall-out.

Germany's Hanover Re, the world's fourth-largest reinsurer, has already warned that Katrina will affect its earnings forecasts; competitors such as Munich Re and Swiss Re have said they may be forced to revise upwards their estimates of how much Katrina has cost them.

But Bermudian reinsurers specialising in natural catastrophes may be the worst hit.

The ultimate insurance tally won't be known for some time as the cost of flood damage is picked up by the federal government. Analysts point out that there are bound to be arguments over what was destroyed as a result of the hurricane and what by flooding. Forecaster RMS published data last week suggesting that the final insurance bill would be between $40bn and $60bn.

Insurance companies in the region are to be forced to extend the claims period, to give residents of New Orleans more chance to get their affairs in order. The order, from the Louisiana state commissioner, means insurers will not be able to withdraw cover if further storms hit the stricken city.

Last week, Lloyd's insurer Beazley estimated its exposure to the disaster at $50 million. Chief executive Andrew Beazley, said profits could be hit by £20m.

Insurance premiums are set to rise sharply in the wake of the hurricane, say experts.