LONDON (Reuters) - A global accounting standard setter has proposed a new rule for measuring insurers' profitability, aiming to shine a light on a sector criticised by investors for being a "black box" that keeps them in the dark.

The International Accounting Standards Board's (IASB) rules are used in over 100 countries including in the EU, which is home to insurers such as Aviva, Axa, Generali and Allianz.

The draft rule would replace a mishmash of national approaches which makes it hard for investors to compare the profitability of insurers and reinsurers.

The IASB introduced an interim standard in 2004 but it has no common measurement method.

"A fundamental review of insurance accounting was long overdue, with current practice resulting in financial information that is impenetrable to all but the most expert of users," IASB chairman David Tweedie said in a statement.

The European life insurance industry has come up with its own method known as embedded value (EV), which takes future income from existing policies into account when calculating profits.

But EV, which is not applied uniformly in Europe and is seen by critics as too complex, has fallen out of favour with shareholders, making it harder for insurers to attract new investors.

The IASB standard, due to come into force probably in 2011, would value contracts using several aspects that look at the cash flow when the insurer fulfils the policy.

A discussion paper had leaned more towards fair value or the going market rate but this raised opposition in the industry.

Investors have applied an "accounting discount" to the multi-trillion dollar sector because of the lack of clarity over how much cash the insurance contracts produce, and the new standard could make the cost of capital cheaper.

It marks a second big challenge facing the European industry in particular, which already has to overhaul its prudential rules under a new EU law known as Solvency II from January 2013.

Ernst & Young, one of the world's "Big Four" auditors, said the short-term pain from switching to the new accounting rule will be worth it for insurers around the world.

"The benefits to the industry and the wider financial community cannot be underestimated," said James Dean, E&Y's global IFRS insurance leader.

"Insurers will have a greater certainty about how their organisation is viewed and evaluated by investors, regulators and other key stakeholders," Dean said.

Insurance experts said it was difficult to know which companies will emerge as winners or losers.

PwC, also a "Big Four" auditor, said the IASB proposals will have a profound impact which investors needed to understand.

"They will create increased volatility in insurers' reported results going forward and market movements will now affect reported profit," said Gail Tucker, a PwC partner.

The IASB was confident the changes will bring benefits.