EU watchdog alters annuity view, insurer shares up

LONDON, Nov 11 (Reuters) - European insurance regulators have indicated they could be open to altering rules for annuity providers that, in their present form, could force UK insurers to raise 50 billion pounds ($84 billion) of capital.

As currently drafted, Europe's Solvency II rules for insurers would force annuity writers to hold extra capital as a reserve in case of declines in the market value of the corporate bonds they use to fund payments to their customers.

This would have a disproportionate effect on British insurers including Legal & General (LGEN.L), Prudential (PRU.L) and Aviva (AV.L) which sell far more annuities than their continental European rivals.

Relief on the news from Frankfurt, where regulatory body CEIOPS is based, helped the insurers' shares trade higher on Wednesday, with L&G, also lifted by a rising market, trading up 5.5 percent and Aviva up 3 percent at 1636 GMT.

Analysts said continental insurance companies could also benefit from the potential for increased sales of annuity-type products to replace dwindling state pensions in the future.

The DJ Stoxx index of European insurance shares rose more than 2 percent .SXIP.

CEIOPS, which two weeks ago postponed a decision on the rules in order to carry out a detailed assessment, indicated in a submission to the European Commission late on Tuesday it could be open to some form of "illiquidity premium", which reduces the liabilities companies have to hold.

The premium, which UK insurers have long been lobbying to be included, is essentially the yield enhancement insurers get from investing in a less liquid asset than a government bond, such as corporate bonds.

Without it, annuity providers would have to carry additional reserves and could be forced to sell assets to match these liabilities.