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EU insurance watchdog unveils benchmark capital rules

FRANKFURT (Reuters) - The European Union's insurance watchdog on Friday unveiled its proposals for rules to regulate long-term savings guarantees that are popular with life insurance policy holders.

Insurance products with guaranteed returns are big business, particularly in Germany and the Netherlands, but insurers have said earlier drafts by the European Insurance and Occupational Pensions Authority (EIOPA) were flawed and needed re-writing.

On Friday, EIOPA unveiled the results of a study carried out with insurers earlier this year, which will be used by the European Commission in finalizing the text for a new risk capital regime for the insurance sector, known as Solvency II, expected to take effect in 2016.

EIOPA Chairman Gabriel Bernardino said the watchdog's report should lay the foundation for an informed political decision on how to handle long-term guarantees under the Solvency II rules.

"Solvency II is a sound framework that needs to be implemented as soon as possible," Bernardino said in a statement. "Experience will help us to further improve the regime once it is already in place."

That strategy might not sit well with the industry, said Charles Garnsworth, a partner at auditing firm PwC.

"Many insurers may find the proposals onerous and will not welcome the continued uncertainty over the final rules," Garnsworth said in a statement.

SEEKING COMPROMISE

Large parts of Solvency II have been agreed but regulators, who have been honing the rules for more than a decade, ran into an impasse over how to measure future obligations to policy holders and the capital insurers must set aside to meet those obligations when long-term guarantees are involved.

Insurers worried that the rules could create artificial volatility in their balance sheets in the face of short-term fluctuations in the value of assets they hold, which are mainly high-quality bonds.

To avoid that volatility, insurers said they might have to cut back on investments that could otherwise support growth in the wider economy. Europe's insurers have about 8.5 trillion euros ($11.34 trillion) in assets under management.

EIOPA came forward on Friday with various proposals to deal with the long-term guarantees, including a so-called volatility balancer that it said would be a predictable and permanent way around the volatility problem.

It also proposed what it called a "classical matching adjustment" in the formula for calculating the value of future liabilities for annuities products, a move that was welcomed by Julian Adams, Executive Director of Insurance at the Bank of England.

"We are pleased that the classic matching adjustment is now recognized as a prudent approach," Adams said in a statement.

Late on Friday, analysts were still poring over the details of EIOPA's proposals.

German insurance association GDV said it was too early to give an immediate comment on Friday.

($1 = 0.7496 euros)

(Reporting by Jonathan Gould and Alexander Huebner; editing by Tom Pfeiffer)

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