The European Union's powerful insurance watchdog EIOPA on Friday blasted stagnant political talks to finalize new risk capital rules for the insurance sector, saying delay was undermining EU credibility internationally.

The rules, known as Solvency II, are aimed at better protecting consumers by forcing sweeping improvement in insurers' risk management systems and capital strength.

But the regulation is now stuck in talks between the Commission, the European Parliament and EU national governments.

Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), told EU Commissioner Michel Barnier in a letter that national supervisors had "major worries" there was still no clear and credible timetable for the rules.

The regulations were to go into force this month but have now been delayed at least until 2014.

Supervisors would be left using outdated rules if EU political institutions did not come to agreement quickly, Bernardino said.

"If we have to continue with supervision on that basis, there is a huge danger that supervisors will not be able to identify and analyze risks correctly and will not be able to take the necessary supervisory actions in time, which may have serious consequences for policyholder protection," Bernardino wrote.

In the absence of new rules, European supervisors would be forced to come up with their own procedures for monitoring insurers and conflicting national solutions would emerge, he added.

A spokesman for Barnier said on Friday the Commissioner had made suggestions to unlock the stalemate between the European Parliament and national governments to win clarity on the timing of the rules.

"The Commission remains convinced that this project needs to be concluded as quickly as possible," spokesman Stefaan De Rynck said.

USEFUL DELAY

Big insurers like Axa or Generali are seen as better prepared than many small insurers, which have only just begun to grapple with the management and information technology changes needed to comply.

Europe's biggest insurer, Allianz, declined comment on Bernardino's letter on Friday but said a postponement would allow insurers to test the system and resolve remaining questions before the rules go fully into force.

Bronek Masojada, chief executive of Bermuda-based insurer Hiscox, agreed.

"I'd rather it be delayed and made better than have it rammed through and have to be changed later," Masojada said.

British and Dutch insurers have a strong tradition of using risk capital models to steer their insurance portfolios and are seen to be ahead in preparations for Solvency II.

However, a study by accounting and consultancy firm Ernst & Young showed that 34 percent of German, 17 percent of Italian and 13 percent of Spanish insurers expect they would only be ready to fulfill Solvency II requirements from 2015.

Solvency II was also seen as a potential model for insurance supervision worldwide but Bernardino said uncertainty over the project was "undermining EU credibility in international discussions".

Once a realistic timetable for the rules is agreed, policymakers should consider earlier implementation of some aspects of the rules, Bernardino said.

(Additional reporting by Myles Neligan in London; Editing by David Holmes and David Cowell)