By Huw Jones and Carolyn Cohn

LONDON, July 8 (Reuters) - Reform of insurance capital rules should not be a "free lunch" that puts pensioners and policyholders at risk, Bank of England Deputy Governor Sam Woods said on Friday, as the industry debates rule changes potentially delayed by political turmoil.

Changing insurance rules known as Solvency II that were inherited from the European Union is seen by government as a key Brexit "dividend" for Britain's financial industry, but the pace and substance of the reform has dismayed insurers.

The EU is further ahead in approving similar changes.

A draft UK law was due to be unveiled this month to implement insurance and other reforms, but political turmoil in Britain has left it without a financial services minister as a new prime minister is chosen.

"The world won't implode if we don't have a City minister for a day or two. I think we are going to get one very soon," Woods told an online event.

"It may of course be the case, given the political situation, that the government needs to take a bit longer to take decisions," Woods said.

The draft law gives the BoE powers to change Solvency II in a way Woods said would release the equivalent of 10-15% of the current capital held by life insurers, which could support between 45 billion and 90 billion pounds in additional investment in the economy.

The BoE has proposed amending three core parts of Solvency II to make it easier for insurers to invest in long-term assets like infrastructure to help Britain meet net zero targets.

Woods said there is general agreement on two of them, but there was opposition to the third, which relates to recalibrating the so-called matching adjustment (MA), which allows insurance companies to recognise as capital up-front a part of the income they expect to earn on their assets in the future.

"In our view, a package which did not tackle the issues we have identified with the matching adjustment would be seriously unbalanced," Woods said.

It would simply remove bits of regulation that insurers don't like, he said, adding that the MA already accounts for capital relief equivalent to two-thirds of the entire capital base of the life insurance industry.

"I worry that some might consider such a thing to be a free lunch, but in fact less capital, fewer checks and fewer restrictions on assets, with no steps to strengthen the part of the regime where that is needed, means more risk for pensioners and other policyholders."

If the BoE did not make its proposed changes to the matching adjustment, the extra release of capital for insurers could total at least 20%, Woods said.

Reporting by Huw Jones and Carolyn Cohn; editing by David Evans