The European Union is close to finalising a deal on how insurance companies will hold enough capital to keep policyholders safe which will severely water down the version sought by industry regulators, a senior EU lawmaker said.

Negotiations on the law known as Solvency II have dragged on for years due to disagreements over how much capital firms must hold to cover to cover products offering guaranteed returns over a long period.

“I guess we are all hoping of a deal in principle on the big points next week,” Sharon Bowles, UK Liberal Democrat chairwoman of the European Parliament's economic affairs committee, told Reuters.

Talks take place on Oct. 24, with a second meeting in early November to tie up loose ends ahead of a plenary vote in parliament in early 2014, Bowles said.

The new law, which will apply to insurers like Aviva, Generali, Allianz and Axa, is expected to take effect in January 2016.

The final version of the new rules will weaken what the sector's regulator, the European Insurance and Occupational Pensions Authority (EIOPA), has proposed, Bowles said.

The three key elements are now largely agreed though there could still be some “chiselling” at the numbers, she added.

The first element, known as a volatility dampener, determines how much insurers can ignore market price swings when it comes to working out how much capital they need.

EIOPA has proposed that 20 percent of volatility can be discounted but the final deal will bump this up to about 65 percent in a move set to please French insurers in particular.

The second element, the matching adjustment, refers to how insurers regard swings in credit spreads.

EIOPA has taken a very conservative approach by introducing a minimum equivalent to 75 percent of long-term average spreads in bonds.

The final law now looks set to set a minimum of about 35 percent for corporate bonds and 30 percent for government bonds an industry official with knowledge of the talks said. This change would please Ireland, Britain and Spain.

“We can live with this. Ideally it would be zero,” the official said.

A third element, known as extrapolation, looks at how an insurer must work out the discount rate on cash flows.

EIOPA has called for a period spanning 40 years for basing this calculation and this is likely to be maintained in the final law, rejecting a push by industry for a much shorter period of a decade.

The sector is also likely to be given 16 years to phase in some of the changes, far longer than EIOPA wanted, but will please German firms.

The regulator has already warned legislators not to water down its proposals but parliament and member states are keen to get a deal before time runs out ahead of European Parliamentelections next May and the appointment of a new European Commission later that year.

Industry officials said a deal was also needed to maintain EU credibility in shaping efforts underway to design a global capital rule for insurer.