One thing has struck me about this year's round of property andcasualty insurance industry-association conferences I'veattended—the seething contempt many executives have forfederal-regulatory involvement in the insurance industry.

More than a few people of this mind point to the currentfinancial morass as justification for their opinion.

They argue that when the mortgage-backed securities house ofcards fell for the banks, insurers were immune from the fallout.Banking institutions were federally supervised and those regulatorsfailed to see the problem and failed to prevent it. Whereas,insurers, regulated by the states, did not fail because they didnot make the bad bets banks did.

Many insurance industry people like to pat themselves on theback for avoiding such a fate.

They further argue that imposition of federal regulation wouldpose an unnecessary burden on the industry with a one-size-fits-allmentality, duplicating processes and increasing costs forconsumers. No consumers would receive more protection, theyargue.

For others, there is nothing to argue, just a deep aversion toany federal involvement that they view as a near-death experience.There are some in this crowd that snicker over the fact that theinstitutions under the federal regulatory eye suffered the largestfinancial collapse in recent history.

The one insurer that almost imploded during the economicmeltdown was American International Group. Some use that as anexample of why insurance companies should be considered forinclusion as systemic risk under the Dodd-Frank Wall Street Reformand Consumer Act. Others argue that AIG's near failure is anoutlier of the industry because the insurance business did notfail. It was the investment arm running rogue.

In fact, AIG should be a lesson for strong federal-regulatoryoversight of the financial-services industry. More importantly, italso demonstrates why the strong presence of state-insuranceregulation needs to be preserved.

I remember as the events surrounding AIG unfolded, I was struckby two things. First, management at AIG failed to grasp what kindof creature they were handling until it bit them. Second, NewYork's regulator recognized something needed to be done, but hisactions were limited because the business that was tearing AIG downwas outside of his jurisdiction, while the federal regulatorsresponsible for the investment side of the corporation sat on theirhands.

And when you think about it, the reality is that theindustry did not walk away unscathed.

The Hartford was among a group of insurers that took TARP money.That lifeline allowed the company time to recoup and kept it fromruin.

Then there are the bond insurers—MBIA and Ambac. They are stillfighting for their lives because they did what insurers aresupposed to do, and AIG failed to do: insure a product byunderwriting it.

Today, they're in the middle of a legal tangle over whether theywere properly informed of the risk they were underwriting andwhether they are obligated to pay, or even owed money.

You can't help but feel at times that the carriers have a case.Take for instance Citigroup's $285 million settlement with theSecurities and Exchange Commission on Oct. 19 for tradingcredit-default obligations without informing investors that thebank was betting on their failure.

The questionable investment practices stemming from thefinancial meltdown only prove one thing: where money is involvedsomeone has to be looking over the other guy's shoulder, and itneeds to be a strong look.

The idea that one form of regulation is better than another isbogus. If the fed hadn't been asleep at the switch we could haveavoided the turmoil we have today. In my mind, it is notincompetence on the part of the fed that was at fault, but afailure of leadership at the White House and Congress to ensureregulation was strong and effective.

Today, the debate rages over the perimeters of authority of theFederal Insurance Office. Is it there for the sole purpose tocollect information, or is it a stepping stone for a federalregulator?

The reality is, while state regulations work well forlocal-business issues, the industry cannot expect to compete on aninternational basis with 56 different jurisdictions against theefficiency of Solvency II.

The fiasco surrounding implementation of the Nonadmitted andReinsurance Reform Act is the perfect example where implementationof a solution to a national issue without a federal authoritybehind it leads to endless bickering and confusion.

Some large states are keeping tax revenues from thesurplus-lines transactions instead of distributing it to where thebusiness is. Others are trying to form cooperatives that share inthe tax distribution. Surplus-lines brokers look for guidance andthey are left with advice, but no definitive resolution.

If a federal regulator was involved he or she would make adefinitive decision. It would probably not make everyone happy, butat least everyone would know the ground rules. And if it doesn'twork, the aggrieved would have somewhere to go to try and make itright.

At some point, regulators, legislators and the insuranceindustry are going to have to come up with a realistic mix offederal and state authority in the pursuit of efficiency anduniformity. The status quo cannot continue.