New York - With the fallout from lobbyist scandals still resonating around Washington, an epic big-money battle is shaping up over possible changes in the regulation of one of America's largest industries: insurance.

Senators Tim Johnson (D-S.D.) and John Sununu (R-N.H.) earlier this month introduced a bill that for the first time would establish a federal regulatory agency to oversee life and property/casualty insurance companies. But insurers would have the option to remain under supervision of their home states.

If enacted, the legislation would give many companies the ability to choose regulators whose rules they find more conducive to profitability. This could produce a big upward jolt to stock prices. The Forbes list of the 400 Best Big Companies contains 24 insurers, including such brand names as State Farm Financial, Chubb, MetLife and Hartford Financial Services.

Passage is far from assured and could be years off. Right now, the opposition is led by turf-conscious state insurance regulators, consumer groups, member-owned insurance companies and trade groups representing independent insurance agents. They won't have the financial resources of Big Insurance to hire expensive lobbyists and make strategic campaign contributions. But they have very loud voices and will be quick to highlight any perceived overstepping by the other side's paid representatives.

This may be surprising to the public, but insurance is just about the last major segment of the financial services industry that is largely regulated on the state level. This is due partly to old court rulings excluding insurance from the definition of "interstate commerce," which the U.S. Constitution explicitly states that Congress can regulate.

For decades, many insurers were content with this cozy system, since state insurance regulators were rarely seen as advocates of the consumer. But differing state rules, state taxes and the cost of multi-state compliance have helped prompt a push for federal regulation. This would exempt insurers choosing a federal charter from much of state jurisdiction--including, possibly, laws giving consumers various rights and protections. There already are estimates that 10% or more of the largest insurers would go federal if allowed.

The American Council of Life Insurers, whose 377 members account for more than 90% of U.S. life insurance assets, is panting for passage of the legislation. The trade group's president, Frank Keating, immediately endorsed it the week it was introduced.

The Johnson/Sununu bill, called the National Insurance Act of 2006, would create a regulatory unit in the U.S. Treasury Department called the Office of National Insurance. As now drafted, the proposed legislation includes annuities, disability insurance and long-care insurance within the definition of insurance product lines that could become the subject of federal regulation. The state-or-federal option would to some degree mirror U.S. banking regulation, where many banks can switch between state and federal charters.

Hearings likely will be held before the Senate Banking Committee.

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William P. Barrett

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