UPDATE: US Insurers Press Case For Federal Regulation

Proponents of creating an optional federal charter for the insurance industry, which is currently regulated by the states, pressed their case Tuesday before a House panel.

The issue has split the industry, pitting life insurers and large property and casualty insurers against small and medium-sized P&C and mutually-owned companies.

It is unclear if the Obama administration will back federal regulation for insurers, or stricter oversight of the industry, when it unveils its plan to rewrite financial rules Wednesday. Backers say federal oversight of the industry is needed for federal regulators to have the information they need to guard against systemic risk.

"Absent a federal insurance regulator, there is a very real question regarding how national policy will be implemented vis-a-vis insurance," Aegon USA Chief Executive Patrick S. Baird argued on behalf of the American Council of Life Insurers. Aegon USA is a subsidiary of Aegon NV (AEG).

Rep. Paul Kanjorski, D-Pa., the chairman of the House Financial Panel's Subcommittee on Capital Markets, said he hoped the administration would call for tougher oversight of the industry and certain insurance activities that may pose a systemic risk.

"We can no longer sweep insurance regulation under the rug and cross our fingers that nothing will go wrong," he argued in opening remarks at the hearing. "We tried it before and learned that such an action may hide the mess for the short term, but pose greater problems in the long term."

Backers of an optional federal charter for insurers have seized on the federal bailout of American International Group (AIG) as evidence of why federal oversight of the industry is needed. However, they argue that companies should be able to chose between federal oversight or state regulation.

Opponents note that it was AIG's financial products division, which traded in risky credit default swaps, that brought the company to the brink of collapse. It's insurance division, meanwhile, remains profitable.

They also say an optional federal charter would allow companies to shop for the lightest regulation, potentially causing harm to consumers.

Legislation to create an optional federal charter was reintroduced this year after gaining little traction in past Congresses. Kanjorski has introduced legislation to create an office of insurance information within the federal government. The bill is broadly supported by the industry.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; [e-mail]