Not sure about XML::Twig but here's how I would do it with XML::LibXML:

#!/usr/bin/env perl

use warnings;
use strict;

use XML::LibXML;

my $file = shift || die "usage $0 <xmlfile>\n";

my $parser = XML::LibXML->new();
my $dom    = $parser->parse_file( $file );
my $doc    = $dom->documentElement();

my @rules  = $doc->findnodes( '/policy/policyrules/Rule' );

my $newdom  = XML::LibXML::Document->new( '1.0', 'UTF-8' );
my $newroot = $dom->createElement( 'policy' );
   $newroot->setAttribute( 'name', 'Cur_policy' );
   $newroot->setAttribute( 'version', '3.2.1' );
   $newdom->setDocumentElement( $newroot );

foreach my $rule ( @rules ) {
  $newroot->appendChild( $rule );
}

print $newdom->toString(1);
[download]

update: Doh! ... no need for a new document:

#!/usr/bin/env perl

use warnings;
use strict;

use XML::LibXML;

my $file = shift || die "usage $0 <xmlfile>\n";

my $parser = XML::LibXML->new();
my $dom    = $parser->parse_file( $file );
my $doc    = $dom->documentElement();

my @rules  = $doc->findnodes( '/policy/policyrules/Rule' );
my $parent = $rules[0]->parentNode->parentNode;
   $parent->removeChildNodes();
   $parent->appendChild( $_ ) foreach @rules;

print $dom->toString(1);
[download]

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