* UK regulator in talks with insurers over annuities fallout
* Insurers see sales of annuities shrink by up to 75 percent
* Companies examining viability of their business models (Adds Legal & General comment on long term investments)
By Huw Jones
LONDON, July 1 (Reuters) - The Bank of England (BoE) isasking insurers how they can stay in business after the Britishgovernment scrapped a rule forcing people to buy their mostsuccessful product, an annuity pension.
Finance minister George Osborne stunned Britain's pensionsindustry in March when he announced the rule change, the biggestreform of pensions in a generation to give savers a choice onhow to use money saved during their working lives.
The Bank of England's supervisory arm, the PrudentialRegulation Authority (PRA), said it was holding talks with lifeinsurers whose annuity sales were their "unique selling point"as other parts of the business are under pressure.
Sales are likely to be significantly and permanentlyreduced, BoE director of life insurance Andrew Bulley told ameeting of parliament's all-party group on insurance andfinancial services on Tuesday.
Life and pensions group Legal & General said afterOsborne's announcement it expects the individual annuitiesmarket to shrink by around three-quarters after the new measurescome into effect next year.
"Insurers and the PRA are currently assessing the likelyimpact of the changes - we are having many conversations withinsurers on this," Bulley told the lawmakers.
Significant potential issues include whether the viabilityof existing business models will be affected, spotting risks innew products companies may have to devise, and the potential formergers among insurers giving rise to new risks, such as a clashof company cultures, he said.
Nigel Wilson, chief executive of Legal & General, told themeeting the annuities market would halve this year to 7 billionpounds and halve again in 2015, with longer-term consequencesfor the sector's investments.
Six insurers said last December they planned to invest 25billion pounds in transport and energy projects, but Wilson saidshrinking annuities would diminish the industry's appetite forsuch investments.
Insurers must match their assets and liabilities but if theyhave fewer annuities to pay out on, they have less need toinvest in matching long-term assets like infrastructure.
However, Wilson told Reuters after the meeting that theindustry will easily achieve the initial 25 billion poundtarget.
European policymakers are looking to insurers to invest ininfrastructure as traditional sources of money such as banksfocus on complying with tougher capital requirements.
Bulley said that while it was up to insurers to decide ontheir business models, the PRA will consider what actions thecompanies must take to mitigate new risks.
Friends Life Group said in May it was expecting a50-70 percent decline in industry annuity sales and it wouldcreate new investment products to woo retirees.
"For many life companies, reacting to a new andfundamentally altered strategic and business landscape will bethe key challenge over the next few years," Bulley said.
Big British life and pensions companies also include Aviva, Prudential and Standard Life.
Asked if Britain's insurers were in reasonable shape to meettougher European Union capital rules known as Solvency II from2016, Bulley replied they were "overall, as well as can beexpected". (Reporting by Huw Jones; editing by Pravin Char and KeironHenderson)