UPDATE 1-EU insurers' watchdog says eyeing 'macro-prudential' review of solvency rules

* Insurance watchdog to review Solvency II in 2021

* Watchdog mulls adding macro-prudential aspects to rules (Adds comment by Bernardino, further details, background)

FRANKFURT, Oct 18 (Reuters) - EU insurance industryregulator EIOPA plans to add broad-brush measures over the nextfew years to its core capital requirement rules, aimed atreducing the risk of a financial crisis developing from withinthe industry, it said on Tuesday.

"Mitigating the likelihood and the impact of a systemiccrisis in insurance be an important policy objective," GabrielBernardino, chairman of the European Insurance and OccupationalPensions Authority (EIOPA), told an insurance conference.

Low global interest rates are challenging insurers' businessmodels by narrowing the margins between what insurers earn frominvestments and pay out to policyholders.

The EU's risk capital requirement rules for insurers, knownas Solvency II, came into force at the start of this year, andtheir effectiveness is to be re-examined after five years.

"Our proposal is to use the 2021 overall review to integratein Solvency II a macro-prudential framework for insurance,"Bernardino said.

Germany's finance ministry this week warned against makingfundamental changes to the Solvency II rules, which only tookeffect on Jan. 1 after more than a decade of development.

But EIOPA wants to ensure "the coherence between micro- andmacro-elements, avoid the emergence of conflicting incentives toinsurers and facilitate the implementation of the regimes by therespective (national) authorities, Bernardino said, adding thatregulators would look at insurers' funding models and newinstruments as part of the effort.

While small and medium-sized insurers have complained thatthe Solvency II rules are already too complex, Europe is alsohome to some of the world's largest insurers, such as Allianz, Axa and Generali, huge investorsoperating across many markets.

Bernardino said macro-prudential operational objectivescould include:

- ensuring sufficient loss-absorption capacity and reserving

- avoiding negative interconnections and excessiveconcentrations

- avoiding excessive involvement in activities whosefeatures may pose systemic risk

- limiting pro-cyclicality and risk behaviour as insurerscollectively search for yield

- avoiding moral hazard

EIOPA would work with the EU's financial early warningsystem, the European Systemic Risk Board (ESRB), in bringingmacro-prudential elements into the solvency rules, he said. (Reporting by Jonathan Gould; Editing by Georgina Prodhan, GregMahlich)