WASHINGTON--Federal lawmakers last week introduced an insurance regulatory reform measure that would make the greatest changes of any proposed in recent history.

Although bills that would create a system of optional federal charters for insurers and producers have been introduced in recent congressional sessions, the National Insurance Consumer Protection Act, introduced last week by Reps. Melissa Bean, D-Ill., and Ed Royce, R-Calif., would require that some insurers deemed "systemically important" be subject to federal rather than state regulation.

Most eligible entities, however, would be permitted to choose whether to come under the new regulatory system or stay under state regulation. The measure would create a new Office of National Insurance headed by a national insurance commissioner within the Treasury Department to oversee federal regulation.

Federally regulated entities still would be subject to certain state laws, including tax laws. National insurers would be subject to examinations by the national insurance commissioner every two years, while national producers would be examined in response to a complaint or violation of the law or regulations.

The bill also would establish a National Insurance Guaranty Corp. that would assume obligations to policyholders for national insurers that become insolvent, although national insurance still would have to participate in state guaranty funds. In addition, the bill would establish a division of consumer affairs within the National Insurance Office. The consumer division would have an office in every state.

During a Washington news conference last week, Rep. Bean said some insurers could be found to be so systemically important that they would be required to be regulated federally.

Under the bill, all insurance regulators--federal or state--would be required to share information with a systemic risk regulator once such an office is established. The systemic regulator, in consultation with the national insurance commissioner, would determine which insurers were so systemically important that they would require federal charters.

Rep. Royce said he was "cautiously optimistic" that Congress would approve the bill.

The New York-based Risk & Insurance Management Society Inc. welcomed the bill and its proposed mandatory federal regulation of some insurers.

Deborah Luthi, RIMS director-external affairs and director-enterprise risk management for Matheson Trucking Inc. in Sacramento, Calif., praised the bill's sponsors and noted that "RIMS has historically supported and continues to support efforts to address the antiquated state system of insurance regulation, which we believe increases costs to insurance purchasers."

"RIMS really is encouraged that the act also addresses weaknesses in the current financial regulatory framework by setting up a system whereby the national insurance commissioner, in consultation with the systemic risk regulator, can require an insurer to be nationally chartered if it is determined to be systemically important," she said.

Joel Wood, senior vp of the Council of Insurance Agents & Brokers in Washington, said "those provisions are what connects the OFC concept--which has been around since the early '90s--with the political realities of this systemic risk debate. Ultimately, the administration and congressional leaders will orchestrate the umbrella regulator, and the insurance-specific issues will flow from that. But they've struck the right balance for this, the first serious opening shot in the debate."

But an opponent of federal insurance regulation said the proposal goes much too far.

"The way they added the systemic risk piece is so broad it creates the worst possible regulatory environment by creating dual regulation," said Jim Grande, vp in the Washington office of the National Assn. of Mutual Insurance Cos. "Under their definition of systemic risk, nearly every property/casualty insurance company in the country would fall under federal jurisdiction."

Ben McKay, senior vp in the Washington office of Property Casualty Insurers Assn. of America, praised the bill's drafters for their efforts but said systemic risk should be dealt with first.

"No matter how you slice it, an insurance regulator does not deal with systemic risk, an insurance regulator deals with intraindustry solvency," Mr. McKay said. "Those two missions are different."

Congress should address systemic risk first "because if you just plug a hole in the dike, another hole will form somewhere else. If you're not looking for that next hole, you'll miss it. We think there should be healthy debate about a federal insurance regulator, but we think that's a Phase 2 debate after systemic risk," Mr. McKay said.

Leigh Ann Pusey, president of the Washington-based American Insurance Assn., which has long advocated federal insurance regulation, praised the bill but questioned the guaranty fund provision.

"We think that consumers would be best protected under a single guaranty fund system, and are concerned with the approach taken by the bill on this issue," she said in a statement. "That said, we look forward to working with the bill's sponsors moving forward in a constructive manner."