* Prudential CEO urges realistic timetable for Solvency II
* EU watchdog EIOPA says 2016 start still possible
* EIOPA envisages "soft landing" phase-in for new rules
* BoE's Bailey offers insurers relief over cost of rules
By Huw Jones and Chris Vellacott
LONDON, July 9 (Reuters) - New European solvency rules for insurers are years away from implementation, with regulators and top insurers warning that they are not workable in their current form.
EU states and lawmakers are due this month to restart negotiations to finalise the long-delayed Solvency II rules to make sure insurers hold enough capital to stay stable and cover their policy commitments.
Some insurers have spent millions of pounds preparing for Solvency II only to see the delay in its introduction, saddling them with two regimes and burdensome costs.
But Tidjane Thiam, chief executive of British insurance giant Prudential warned at an industry gathering on Tuesday that getting the design wrong could hinder the flow of capital in the region and crimp economic growth.
Some delegates at the Association of British Insurers (ABI) conference went further and called for the proposed new regime to be scrapped to avoid costs to the industry mounting as companies rush to comply ahead of implementation.
Thiam said it was also important to have a realistic timetable for phasing in the new rules once they are finalised, and that they must be formulated with a close eye on their potential economic impact.
"Getting this wrong will have real consequences for our economy and for jobs, for growth and how we deal with an ageing population," Thiam told the ABI, which he chairs. "Regulation cannot be developed in a vacuum."
Solvency II was meant to be in force by now but was delayed after Britain, Germany and France called for a rethink over how products that offer guaranteed returns over the long term are treated to avoid overly burdensome capital requirements.
The European Insurance and Occupational Pensions Authority (EIOPA) has just published a draft solution for the treatment of such products to allow EU states and lawmakers to resume negotiations on a final deal.
EIOPA Chairman Gabriel Bernardino said in a speech at the ABI conference looking at the sector in 2020 that the watchdog's proposals would be seen as a basis for a political deal in 2013 on Solvency II.
"Solvency II proved to have a good effect on insurers' behaviour. We see insurers only investing in assets whose risks they understand," Bernardino told the conference.
He signalled that insurers should expect much tougher scrutiny of whether their products are suited to customers, and echoed Thiam's warning of dire consequences if implementation fails.
"If we don't do the right thing the consequences can be really devastating for consumers," he said, while expressing confidence that the final outcome would be a good regime. He said it was possible for the new rules to be in effect by 2016.
There would need to be a "transitional period to put important elements of Solvency II into effect", Bernardino told Reuters. "This is in order to have a kind of a soft landing and not to disrupt the markets."
Andrew Bailey, chief executive of the Bank of England's Prudential Regulation Authority which regulates UK insurers, said its "planning horizon" for the rules was January 2016.
"My view is that we still have a good way to go to make the Solvency II regime manageable in its use and implementation," Bailey told the ABI conference.
He said he would allow UK insurers to apply Solvency II preparations so far to cut down on costly duplication, but the regulator would introduce "early warning indicators" as a cross-check on the capital levels.
Bailey said the PRA was conducting stress tests to make sure insurers hold enough capital to withstand market shocks like a sharp reversal in current historically low interest rates.