FRANKFURT (Reuters)—Europe's insurers are on course for a disagreement with regulators over new capital rules aimed at protecting policy holders in case of financial meltdown.

Insurers, who have been working closely with financial watchdogs for years to help draft the new rules, said this week regulators were being "excessively prudent" about the amount of funds insurers must hold to ward off a crisis.

"They would be bad for consumers, bad for Europe's economy and bad for the insurance industry," E.U. insurance trade body CEA said.

On Friday, the committee of E.U. insurance supervisors working on technical aspects of the new rules—the Committee of European Insurance and Occupational Pensions Supervisors—fired back.

"Over-prudence has to be avoided, as well as under-prudence," CEIOPS said in a statement.

"CEIOPS has incorporated in its advice the lessons learned from the crisis," the watchdog said, adding that it was well aware that the insurance sector had not caused the financial crisis and that insurers' business models differed from banks'.

Both regulators and industry say they support the ultimate objective of the new rules, known as Solvency II, to usher in a more sophisticated, principles-based system for managing capital according to the risks on insurers' books rather than a simplistic, rules-based one.

"Adequate protection (of policyholders) can only be ensured by getting the system right," CEIOPS said.

The spat risks entrenching the positions of industry and regulators and complicating the task of finalizing the rules.

Insurers worry they are being tarred with the same brush as banks, with their businesses unfairly punished as regulators around the world respond to the financial crisis.

They hope the European Commission will take their remaining concerns into account as it draws up the details of how the new rules will be implemented, after CEIOPS gave its advice earlier this month.

The industry hopes the European Parliament's powerful Economic and Monetary Affairs Committee will take a sympathetic view of their case when it meets in Brussels on Tuesday.

A CEIOPS task force has flagged a series of concerns to the commission about rule changes of crucial importance to big annuity writers such as Legal & General, Prudential P.L.C. and Aviva P.L.C., highlighting the need for consistency on the new capital rules that British insurers fear could force them to raise up to £50 billion ($76 billion).

The chief executives of German reinsurers Munich Reinsurance Co. and Hannover Reinsurance Co. this week said they were pleased that CEIOPS had softened its line on capital requirements somewhat from its initial thinking last year.

Reinsurers also hope that the Solvency II rules will generate additional demand for their services from their insurance company clients.

The chief executive of Europe's biggest insurer, Allianz S.E., has predicted that an expected wave of consolidation in the sector will not take off until the new rules are clear and companies are able to better judge their available capital.