LONDON (Reuters)—Europe's proposed Solvency II capital rules for insurers could have dire consequences for the sector, making it more vulnerable to economic downturns and forcing it to charge higher prices, insurers said on Monday.

The current overly conservative approach would also usher in a less predictable regulatory environment and hold back the industry's growth, four lobby groups said in a letter to European Internal Market Commissioner Michel Barnier.

"Stakes are high and time is running out," the Comité Européen des Assurances, the Pan European Insurance Forum, the CFO Forum and the CRO Forum said. "A failure to properly implement this reform would have dire consequences for an industry that represents a significant component of the E.U. economy, capital markets, old-age savings and jobs."

Solvency II, due to come into force in January 2013, is intended to protect consumers by making insurers hold reserves in proportion to the risks they underwrite.

The industry's concerns center on a proposed big increase in the capital underpinning of long-term policies such as annuities, which it says would make such products more expensive.

"For insurers, the current draft of the rules is poorly thought through in places, leading to them holding unnecessarily high levels of capital, ultimately penalizing consumers," said Peter Vipond, director of regulation at the Assn. of British Insurers.

Critics have also said a proposal to value insurers' assets on a mark-to-market basis could leave them needing fresh capital just as financial markets weaken, potentially exacerbating a market downturn.

The European Insurance and Occupational Pensions Authority, a European insurance regulatory body, is working on a final draft of the Solvency II implementing measures after tests last year showed the sector held strong capital buffers under the new rules.

In a concession to industry lobbying, E.U. authorities have already agreed to look into limiting the capital impact of falling financial markets by applying an "illiquidity premium" to nongovernment debt held as capital by insurers.

German group Allianz S.E., Europe's biggest insurer, said in February the current version of Solvency II would endanger the life of the insurance industry.

Dutch insurer Aegon N.V. has said it could relocate outside the E.U. after Solvency II comes into force to remain globally competitive.