Insurance products with guaranteed returns are popular particularly in Germany and the Netherlands but insurers have said rules proposed by the European Insurance and Occupational Pensions Authority (EIOPA) were flawed and needed re-drafting.

EIOPA is studying options for determining how much capital insurers must hold to meet the guaranteed returns to policy holders years - sometimes decades - into the future, and plans to publish its results next month.

On Wednesday, Moody's predicted insurers would ultimately get relatively generous treatment, partly because politicians had recognised that punitive rules would place a heavier capital burden on insurers selling guaranteed products and also because Europe wanted insurers to be able to finance the wider economy.

"We expect an outcome that will be relatively less disruptive to the industry," Moody's Senior Credit Officer Dominic Simpson said of the long-term guarantee debate which has been a major sticking point in finalising a bigger package of risk-capital rules for insurers known as Solvency II.

Solvency II is expected to take effect in 2016 following a series of delays. Policy officials indicated rising hopes this week that the rules could be finalised and passed into EU law before European Parliamentary elections in June, 2014.

The volatility of insurers' regulatory capital cushions under Solvency II could make investors in the sector skittish and prompt regulators to intervene more frequently than in the past, Moody's warned.

Life insurers are suffering from low interest rates, caught in a bind between the relatively high guarantees they gave to their customers in the past and the low yields they can earn on their investments in safe government bonds now.

"A product with a guaranteed return and a low interest rate environment is a difficult combination at the moment," Simpson said.

EIOPA's study will be taken into account by the European Commission and Europe's politicians in setting the final rules.

Small, stand-alone life insurers will be particularly affected by the outcome of the long-term guarantee discussion, Moody's said.

Big insurers like Aegon (>> AEGON), Allianz (>> Allianz SE), Axa (>> AXA), Generali (>> Assicurazioni Generali SpA), ING (>> ING GROEP), Munich Re (>> Muenchener Rueckversicherungs-Ges. AG) and Zurich (>> Zurich Insurance Group Ltd) will see relatively less impact because they benefit from their business diversification, Moody's said.

British annuity writers like Legal & General (>> Legal & General Group Plc) and Prudential (>> Prudential plc) have products that share risk with policy holders and also benefit from having diversified business, Moody's added.

(Reporting by Jonathan Gould; Editing by Jon Hemming)

By Jonathan Gould