WASHINGTON--A Treasury official declined yesterday to endorseany of the various proposals for federal involvement in insuranceregulation, but said the problems facing the industry would likelyrequire some congressional action.

In testimony before the Senate Banking Committee, Treasury UnderSecretary for Domestic Finance Randal Quarles said Treasury hasbeen "monitoring the developments of the various approaches tomodernizing insurance regulation."

He said they had been examining proposals by the NationalAssociation of Insurance Commissioners as well as bills toestablish federal standards to be enforced by states or to createan optional federal charter framework.

"While we are still evaluating what approach we believe to bethe most appropriate, what is clear is that each of them should beassessed" in light of the issues facing the industry.

Like other financial services, Mr. Quarles noted that insuranceplays an important role in the U.S. economy due to the enormousamount of assets managed by the insurance industry and thepotential for "ripple effects" of conditions in the insuranceindustry being felt across the general economy.

"Unlike banking and securities sectors," he added, "insurance issolely regulated at the state level, and while this multiplicity ofregulators can provide certain benefits in the form of localexpertise and control, it does raise a number of issues thatdeserve further consideration."

Among the main problems, Mr. Quarles said, are the potentialinefficiencies within the current state-based regulatory scheme,especially through price and form controls, and the system'sinability to recognize and adapt to the evolving and growing needsof the industry and international issues.

On the international front, Mr. Quarles noted that the EuropeanUnion has been working to establish one insurance regulatory regimefor all of its members, and that the fractured U.S. regulatoryscheme is generally among the top trade issues in discussions withEU representatives.

Other witnesses also testified for the need for federal action,and were equally unspecific as to what form that action shouldtake.

Scott Harrington of the Wharton School of Business at theUniversity of Pennsylvania said that he had been opposed to federalregulation as recently as 2002. However, he said after conductingresearch for an issues paper on the topic this year, "I concludedthat a transformation of insurance regulation was necessary topromote healthy price and product competition and to eliminateregulatory micromanagement of price and product decisions, and thatsuch a transformation could not be achieved without federalintervention."

Robert Klein, a former chief economist for the NAIC and currentdirector of the Center for Risk Management and Insurance Researchat Georgia State University, said he recognizes the need forfurther reforms, but prefers a system of state regulation withstrong federal standards and oversight.

"In essence, the states need to appropriately and efficientlyregulate things that need to be regulated and not regulate thingsthat do not need to be regulated," he said. "If this cannot beachieved under the institutional arrangement, I would prefer anoptional federal charter approach."

In response to questioning from the committee, both Mr. Kleinand Mr. Harrington rejected the concept of separating the industryby life and property and casualty lines to create a "life only"federal charter.

Although the greater uniformity among products in the lifeindustry would make the process of establishing a federal chartersimpler, they said that many of the problems that make a federalsolution necessary, such as the varying regulations from state tostate, are more keenly felt in property and casualty lines.

Another issue that would need to be resolved prior to enacting afederal system is that of guaranty fund participation. Mr.Harrington said that in the short term, any federal charterproposal would likely have to mandate that federally regulatedcompanies contribute to the guaranty funds of the states theyoperate in to avoid severely weakening those funds as insurers moveto the federal regulatory system, but that a federal guaranty fundcould be established to resolve the problem over the long term.