Insurance regulation should remain with the states, and switching to an optional federal insurance charter (OFC) would be tantamount to deregulation, according to a letter sent yesterday to the Treasury Department by a consumer advocacy group.

Consumer Watchdog, based in California, wrote to Treasury Secretary Tim Geithner, “Recently, a few members of Congress wrote you urging the creation of an office or position responsible for insurance oversight in the Department of Treasury. The request is couched as part of a regulatory overhaul of the financial markets. While the need for a financial regulatory overhaul is clear, it should be not used as a stalking horse for insurance deregulation.”

The letter was announced on a day when House members Rep. Melissa Bean, D-Ill., and Rep. Ed Royce, R-Calif., said they would sponsor legislation to create a federal office of insurance regulation.

Consumer Watchdog–formed by Proposition 103 organizer Harvey Rosenfield, and formerly known as Foundation for Taxpayer and Consumer Rights–mentioned that Representatives Bean and Royce had written a letter seeking federal oversight.

The consumer group said that the aim of those who seek federal oversight is to avoid stringent state regulations.

“Supporters of this plan are not seeking greater federal regulation,” Consumer Watchdog wrote. “To the contrary, their purpose is to allow insurers to escape oversight. Proponents have made no secret of the fact that they consider an insurance office at Treasury to be a vehicle for limiting the role of the states in the insurance marketplace.”

The letter cites insurance regulation initiatives in California, such as Proposition 103, as examples of strict state regulation that proponents of an OFC are trying to avoid. The 103 ballot initiative passed in 1988 put restrictions on insurance rate increases and coverage and underwriting in the state.

Watchdog said insurance regulation should not be a choice for insurance companies to make, as would be the case under an OFC.

Consumer Watchdog also wrote that state regulation helped insurers avoid financial trouble from the current economic crisis.

“Allowing insurers to select which standards apply to them will result in the negation of hard-won consumer rights laws and destroy the state-based oversight that set insurance products and companies apart from much of the financial sector during this period of extraordinary upheaval,” states the letter.

Consumer Watchdog also challenged the assertions of OFC proponents that American International Group conglomerate is an example of the need for federal regulation.

“Representatives Bean and Royce cite the failure of AIG, 'once the largest U.S. insurance company,' as proof of the need for federal insurance oversight,” the letter said. “In fact, the company's insurance units remained generally healthy in a reeling economy because of strong state regulation, even as its federally overseen holding company nearly destroyed the conglomerate.”

The letter said Consumer Watchdog would not oppose the collection of data by the federal government to build expertise on the national insurance market.

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