An influential group of financial services executives isproposing creation of an omnibus federal financial regulator, whosejurisdiction would include property-casualty and life insurers, aswell as their producers.

The proposal adopted by the board of the Financial ServicesRoundtable is being circulated to congressional leaders as well asofficials in the Obama administration, according to Peter Freeman,vice president for insurance for the FSR. The group put out itsrecommendations in anticipation of the Obama administration'sblueprint for oversight of financial institutions, expected to bereleased shortly.

President Obama indicated before he took office that he wants alegislative proposal for financial regulation unveiled before April2, when leaders of the world's largest economies meet for the G-20summit in London.

The Roundtable recommendations follow a recent report by theGroup Of 30, headed by former Federal Reserve Chairman Paul Volcker(who is an economic advisor to President Obama), which calls forfederal oversight of multinational insurers.

Among other provisions, the FSR proposal calls for creation of aFinancial Markets Coordinating Council tooversee five federalagencies. The panel would be an expansion of thePresidentialWorking Group on Financial Markets and would continue to playanadvisory role without independent regulatory authority.

Under the plan, the Federal Reserve would be granted new powersto ensure stability of the entire financial system, with theauthority to override otherregulators.

Insurers would be regulated through a National FinancialInstitutionsRegulator, whose office would merge national regulationof banks and thrifts, broker-dealers and investment companies. Itwould combine the Office of theComptroller of the Currency, Officeof Thrift Supervision and FinancialIndustry RegulatoryAuthority.

The FSR plan also proposes expanding the authority of theFederal Deposit Insurance Corp. to include insuring nationalinsurers. It would be called the National Insurance and ResolutionAuthority.

According to the FSR's Mr. Freeman, the insurance regulator atthe federal level would have supervisory authority not only of aninsurance company but over its holding company as well.

He cited the case of American International Group, whose ventureinto credit default swaps at the holding company level--under thepresumed authority of the federal Office of Thrift Supervision,rather than state insurance regulators--is being blamed for thecompany's financial problems and subsequent federal bailout.

Mr. Freeman said FSR doesn't see the latest proposal asabandoning the concept of an optional federal insurance charter. "Idon't see it that way," he noted. "This proposal still provides anoption for insurers to choose between the state system and thefederal system."

He explained that FSR directors adopted this "architecture" forfederal regulation of insurance because "they understand that theongoing crisis in the world financial markets has revealed gaps andweaknesses within the current regulatory system, and the regulatoryframework we are proposing is designed to deal with the weaknessesthat have clearly materialized in the last year."

He added that all these principles are designed to get thediscussion moving on what a new architecture for insuranceregulation should look like.

Under the FSR plan, the national financial institutionsregulator would oversee all insurers, brokers and agents thatchoose to be regulated at the national level, according to Mr.Freeman. "It would be comparable to a national bank charter, andhave regulatory authority over life and property-casualty insurersas well as producers."

He said the national insurance supervisor would handle rate andform regulation, safety and soundness, solvency and riskmanagement--adding that it could include rate regulation.

"We don't want to create a situation where we have bifurcatedregulation--where you have one regulator setting capital standardsand another regulator at the state level regulating rates andforms," he said.

Federally chartered insurers should be subject to a prior-noticeprocess for addressing policy forms, which does not delay thedevelopment and marketing of new products for consumers, Mr.Freeman said. Federal law should rely upon competitive marketforces to establish premium rates, he added.

FSR insurance members include Aegon, Allianz, Allstate,Ameriprise, Aon, Assurant, AXA, Brown & Brown, ING, LibertyMutual, Lincoln National, Mutual of Omaha, Northwest Mutual, thePrincipal, Protective Life, Prudential Insurance, State Farm,TIAA-Cref and Unum. Insurers make up 28 percent of the FSRmembership.

Meanwhile, Rep. Barney Frank, D-Mass., chair of the HouseFinancial Services Committee, said his panel will be working onlegislation creating an optional federal insurance charter,"particularly for life insurers."

He said the committee's top priority would be working onlegislation establishing a systemwide risk regulator covering allforms of financial activity, and that the new systemic riskregulator--most likely the Federal Reserve Board--will have "someflexibility to decide what the risk is."

Regarding an OFC, Rep. Frank said he would leave the issue offuture regulation of insurance to Rep. Paul Kanjorski, D-Pa., chairof the panel's Capital Markets Subcommittee, who held severalhearings on the subject during the last Congress and introducedH.R. 5840, which failed to pass the House in September, that wouldhave created an Office of Insurance Information within the TreasuryDepartment.

One incentive for federal regulation of insurers, Rep. Franknoted, is that European regulators have been pushing for the UnitedStates to establish an OFC.

In addition, Rep. Frank said he will work with Rep. GeorgeMiller, D-Calif., chair of the House Education and Labor Committee,to draft legislation creating a federal agency that would guaranteemunicipal bonds.

Impacted by losses related to subprime mortgages, many bondinsurers have struggled to maintain the financial strength ratingsnecessary to back municipal bonds.

Rep. Frank also said that omnibus budget legislation willinclude a provision extending authorization of the current NationalFlood Insurance Program until September. The current authorizationfor the program runs out March 6.

In related news, two members of the Troubled Asset ReliefProgram Oversight Panel have recommended in a minority report thatCongress create an optional federal charter for insurers.

"Congress should institute a federal charter that may beutilized by insurance firms to underwrite, market and sell productson a national basis," the minority report said. "By allowinginsurance firms to choose between a unified national charter ormaintaining operations under existing state regulation, Congresscan build upon the success of state guaranty pools and maintainstate jurisdiction over premium taxes."

The recommendation for an OFC was made by former U.S. Sen. JohnSununu, R-N.H., and Rep. Jeb Hensarling, R-Texas, now the rankingminority member of the Subcommittee on Financial Institutions andConsumer Credit of the House Financial Services Committee.

Mr. Sununu, who was defeated in November for reelection, was aprimary sponsor for the past two Congresses of legislation thatwould create an optional federal charter for insurers.

The Special Report on Regulatory Reform was mandated through theEmergency Economic Stabilization Act, passed by Congress lastSeptember.

The minority section of that report said a national charterwould "allow regulators to take a comprehensive view of the safetyand soundness of large insurance companies, and to betterunderstand the potential risks they may pose to the strength of thebroader U.S. economy."

In general, the report said, "modernized regulation candramatically reduce the risk of crises and swindles whilepreserving the key benefits of a vibrant financial system."

In their minority suggestions, Mr. Sununu and Rep. Hensarlingcited the case of AIG. They said that while individual stateinsurance regulators have effectively managed state guaranty pools,as well as safety and soundness within their jurisdiction, "theysimply are not equipped to effectively oversee a global firm suchas AIG, which had 209 subsidiaries at the time the federalgovernment acted to prevent its collapse in the fall of 2008."

Of the 209 subsidiaries, the report said, only 12 fell under thejurisdiction of the New York insurance department, which waseffectively AIG's primary regulator.

"By allowing insurance firms to choose between a unifiednational charter or maintaining operations under existing stateregulation, Congress can build upon the success of state guarantypools and maintain state jurisdiction over premium taxes," theirreport said.

A national charter would also allow regulators to take acomprehensive view of the safety and soundness of large insurancecompanies and to better understand the potential risks they maypose to the strength of the broader U.S. economy, they wrote.

"Lastly, a federal insurance regulator would be able toimplement effective consumer protection, provide a clear federalvoice to coordinate global insurance regulation with foreigncounterparts, and ensure appropriate access for U.S. insurancecompanies in overseas markets," they said.