LAS VEGAS--Whether federal authorities' failure to foresee andhead off the subprime mortgage crisis is evidence Washington shouldnot be trusted with insurance oversight was a focus of contentionhere yesterday in a face-off between the nation's top stateregulator and an industry association leader.

The disparate views on the topic were aired by the president ofthe National Association of Insurance Commissioners, Sandy Praeger,the Kansas insurance commissioner, and American InsuranceAssociation President Marc Racicot.

Their contrary opinions came during "The Great Debate: Federalvs. State Regulation" at the National Insurance Industry Convention& Expo here, moderated by this reporter. It was the first of aplanned pair of debates on the future of insurance supervision.

Ms. Praeger said state regulation has its shortcomings andcertainly must continue to evolve to meet emerging marketrequirements. But handing over responsibility to a federalgovernment that botched oversight of other financial servicesindustries is not the answer, she added.

Mr. Racicot countered that the entire premise of that argumentis bogus, stating that federal regulatory agencies lacked theauthority to supervise the elements that got the subprime mortgagemarket into trouble. Such a mistake would not be repeated increating a new national insurance oversight system under anoptional federal charter, he added.

The pair will face off again on Sept. 25--this time nationwideover the Web--as part of National Underwriter's second annualvirtual conference, "Facing The Future of Insurance."

"We're seeing problems in financial services solvency, but notin the insurance business," said Ms. Praeger, who opined that "thefederal government did not do such a good job" with the subprimemortgage market.

In contrast, she said, when it comes to state regulation ofinsurer solvency, "our house is in order...State regulation isworking, and consumers are being protected. We have a robust[insurance] marketplace."

But Mr. Racicot, the former governor of Montana, challenged thevalidity of comparing how the subprime mortgage market wasregulated with how insurance might be handled by a federalregulator as part of an optional federal charter system forinsurers.

He said that most of the activities leading up to the collapseof the mortgage market did not come under the purview of anyspecific federal regulatory agency--a gap that is being addressedby Congress now in debates over how best to improve and modernizethe oversight system.

"We want vigorous regulation [of insurance]," he added. "We justwant insurers and producers to have the option of having thatregulation under a federal charter."

But Ms. Praeger would not let Washington off the hook for thesubprime mess. "Congress was asleep at the switch. They failed torecognize the problem and respond accordingly," she said.

"Had Congress been paying closer attention," said Ms. Praeger,"they would have seen the problem developing in the subprimemortgage market. If their agencies lacked the regulatory authorityto act, they should have found a way to sound the alarm and fix theproblem before it got this bad."

The duo debated the merits, or lack thereof, of eitherestablishing an optional federal charter, leaving the status quointact, or adopting one of the in-between measures working theirway through Congress--to establish a federal Office of InsuranceInformation, set national benchmarks for regulation of surpluslines and reinsurance, and/or create a nationwide producerlicensing system.

Mr. Racicot made it clear that OFC is the preference of AIAmember companies--although he emphasized the "optional" part of thecharter proposal, noting that anyone who wished to remainstate-regulated could do so, just like in the banking business.

But Ms. Praeger argued that having two regulatory systems wouldend up being "a race to the bottom. With such an option, we couldend up with regulatory arbitrage, with carriers opting for the lessvigorous federal alternative," to the ultimate detriment ofconsumers.

Mr. Racicot dismissed such concerns, arguing that a federalregulator would add efficiency and cut costs from the oversightsystem, while speeding products to market and encouraging morecapital to flow into domestic insurance sectors--all to the benefitof consumers.

He added that no matter how well-meaning and hard-working stateinsurance commissioners are, "fifty-six U.S. regulators are notauthorized, let alone capable, of presenting a cohesive system" tothe global insurance market.

He added that under the current system, "it is virtuallyimpossible to drive new products to market in a reasonable periodof time and at a reasonable expense."

He said this puts his carriers and the U.S. market as a whole ata competitive disadvantage in this "planetary economy," whiledriving insurance capital offshore.

Ms. Praeger countered that the U.S. insurance industry isvigorous, profitable and growing. "If anyone says we have a problemin insurance, the evidence does not bear that out," sheconcluded.