Banks, Insurance Companies Duel Over Dual Regulation.

A banking group has proposed a system that would allow insurers to choose state or federal oversight.

Although insurance trade groups say state regulation can be improved, they're not prepared to abandon the state system in favor of dual federal and state insurance regulatory system that mirrors how banks are regulated.

The ABA Insurance Association, an affiliate of the American Bankers Association, proposes creating a dual regulatory system that would allow insurers to decide whether they want to be regulated by the states or by a new federal insurance commissioner.

So far, the proposal is in the form of a white paper and hasn't been introduced in Congress. The idea has been pitched--and dropped--in the past.

The association represents 12 banks that sell or operate in the insurance industry, including such giants as Bank of America Corp., Chase Manhattan Corp., Citi-group, Fleet Boston Corp., Wells Fargo and others.

"We believe that a single, federal insurance regulator would simplify regulatory compliance requirements and stimulate the development of uniform products," the bankers' group said in its proposal. "Indeed, that has been the case in the insurance industry."

Insurance groups so far have given the proposal a chilly reception.

"While the state regulation of insurance can obviously be improved, we're not so sure creating a bureaucracy at the federal level is a reason to go forward with this proposal," said Robert Dibblee, senior vice president of government affairs for the National Association of Independent Insurers.

The proposals calls for a new federal insurance commissioner, who would work within the Treasury Department, much like the Office of the Comptroller of the Currency. As an alternative, the association proposes a similar office within the Securities and Exchange Commission. The commissioner would be appointed by the president.

Banks have operated under a dual regulatory system since 1863. "There are good arguments for that structure, most notably its independence," the group said.

The issue of state regulation was a matter of fierce debate on Capitol Hill as legislators haggled over the Gramm-Leach-Bliley act. The act, which revamps financial-services law and allows banks to sell insurance, preserves state regulation of insurance but requires uniformity in areas such as agent licensing.

The act also gives state regulators their first major test, in the form of agent licensing. State legislatures have three years to adopt a law that allows for uniform licensing laws across the United States or reciprocal laws that recognize other states' provisions. At least 29 states must pass such laws within the time limit. If states don't act, the National Association of Registered Agents and Brokers provisions within the recently enacted federal financial-services law will mandate uniformity and wrest regulatory control from state insurance commissioners.

"This will be the first of what I think will be many challenges to see if state regulation works," said Rodger Lawson, president of the Alliance of American Insurers. Lawson said that so far, it seems as if state officials are "trying to get these things done in a way that makes sense," he said.

But with the ink barely dry on the Gramm-Leach-Bliley act and its compromises that protect state regulation, insurance trade groups argue that the act should be given a chance to work before a new proposal surfaces.

"For several reasons, these ideas of a dual charter and federal regulation are ill-timed," Dibblee said. "Gramm-Leach-Bliley is a complex bill. It's going to take several years until we know the impact of the bill's provisions."

The National Association of Professional Insurance Agents agrees. "This is what supporters of functional state regulation feared all along," said Dean Sackett, vice president of governmental affairs at the PIA.

Dibblee took issue with the bankers' group's argument that an appointed federal regulator would be more independent than an elected or appointed state regulator. "We don't think that this creates the type of office that is going to be free of political influence," Dibblee said.

Also, insurers can better work with individual state commissioners, even if some are politically motivated. "It's better to have 50 mad scientists than one mad scientist," Dibblee said. "State regulation can be made more efficient and we can improve on it."