by: Beth Braverman

Both sides argue their plan would best serve policyholders by promoting their interests and pushing down premiums.

''Uniform application of regulations [through a federal system] should compel uniform protection of policyholders through assurance of carrier solvency, instead of the current system where some regulators protect policyholders better than others,'' said David Wood, a partner with insurance law firm Wood Bender.

Mr. Wood argues that insurance companies could cut costs and pass those savings on to policyholders if they only had to conform to one set of federal regulations, instead of 50 sets of state regulations.

Proponents of the state system say it benefits policyholders because it places their interests above those of company managements and stockholders. State regulators are more accessible to policyholders than a more bureaucratic federal system might be, they say.

Both sides point to state regulators' response to the near-collapse of AIG, which has more than 71 insurance subsidiaries domiciled in 19 states, as proving their point.

Proponents of federal regulation (most of whom favor an optional federal charter for insurance companies) argue that state regulators could not foresee the problems at AIG's parent company because of their limited scope and interest. When the problems at AIG did occur, state regulators had no tools that would allow them to prop up the ailing company and protect policyholders in their states, critics say.

Those who support the current system of state-level regulation, on the other hand, interpret the AIG crisis as proof that state regulators can handle even the biggest insurance disaster. AIG's insurance subsidiaries, which fall under state regulation, remain well funded and solvent, they say.

AIG's commercial insurance business has continued to pay out more than $70 million a day in claims, John Doyle, the CEO of that unit, said in a conference call earlier this month. A group of state insurance commissioners is working with AIG to oversee any sales of the company's insurance divisions to pay back its $85 billion federal loan.

Typically, small insurance providers favor state regulation, while larger insurers and commercial insurers see federal regulation as a means to cut costs and increase their ability to compete in a global market.

Mr. Wood said state regulators did an inadequate job even before AIG because they lack funding and have limited enforcement ability. He favors a federal system, similar to the Federal Deposit Insurance Corp., under which federal regulators would constantly monitor insurers' parent corporations and could force changes or take over a company if its solvency came into question.

''For years, we have seen evidence that [state] insurance regulators are outgunned and outmanned by the very companies they are supposed to restrain,'' he said. ''Our insurance industry is too important to our national security and our economy to have to hope that [state regulators] have done their jobs right.''

Insurers could offer better and lower-priced products if they did not have to contend with the ''patchwork'' state regulatory system, said Leigh Ann Pusey, senior vice president of government affairs for the American Insurance Association, which supports an optional federal charter.

''We see an ongoing challenge for the current system to keep pace with the developments in the financial services sector as well as in the insurance sector,'' Ms. Pusey said.

Representatives from the National Association of Insurance Commissioners, which supports state regulation, could not be reached for comment. Earlier this month, NAIC president and Kansas insurance com-missioner Sandy Praeger wrote in a letter to the House Committee on Oversight and Government Reform that state regulators were ''not part of the problem'' that led to AIG's downfall.

''Supporters of the [optional federal charter] proposal routinely cite the desire to have a system akin to the banking system, which is the very model that has led to the problems taxpayers must now bail out,'' Ms. Praeger wrote.

Recent industry reforms have followed state-level litigation. But Mr. Wood said state regulators have resisted the shift to federal oversight because it benefits them personally.

Experts say that while it is unlikely Congress will take any action before the November elections, the potential systemic risk associated with insurance means the industry will face sweeping regulatory changes under the next administration, regardless of which party takes the White House.

''Washington is thinking really, really big right now,'' said Jimi Grande, vice president for federal affairs at the National Association of Mutual Insurance Companies, which favors state regulation. ''When you're looking at the broader picture of financial services, you're not going to exclude insurance.'' FW