WASHINGTON—The Obama administration has sent Congress draft legislation that would create an Office of National Insurance within the Treasury Department.

The proposal came as part of a larger financial services regulatory reform legislative package unveiled by the administration late Wednesday.

The new office would, among other things, “monitor all aspects of the insurance industry including identifying issues or gaps in the regulation of insurance that could contribute to a systemic crisis in the insurance industry or the United States financial system.” The office, which would be headed by a director appointed by the Treasury secretary, could recommend to the Federal Reserve that that it designate an insurer and its affiliates as a Tier 1 financial holding company subject to heightened regulation.

The office would oversee the federal terrorism insurance backstop program, coordinate and establish federal policy “on prudential aspects of international insurance matters” and consult with state regulators. The office would have a limited ability to pre-empt state regulation under certain circumstances, but it would have no authority over state laws affecting rates, underwriting or sales practices. The office would also have the power to subpoena information from insurers.

As part of its international duties, the office would represent the United States in the International Assn. of Insurance Supervisors. The measure also would give the Treasury secretary power “to negotiate and enter into international insurance agreements on prudential matters on behalf of the United States.”

The office would have no jurisdiction over health insurance.

The proposed legislation tracks the administration’s earlier outline for such an office closely and builds upon the Insurance Information Act introduced by Rep. Paul Kanjorski, D-Pa., in May.

Rep. Kanjorski issued a statement Wednesday evening hailing the administration’s proposal.

“The current economic crisis, including the meltdown of American International Group, has poignantly shown that an office to provide a knowledge center within the federal government on insurance is urgently needed,” the statement said. “While other sectors of the financial services industry have some sort of representation at the federal level, insurance is left out, causing gaping holes in the oversight of the industry. The Office of National Insurance would help to fill those regulatory gaps and assist Congress and the federal government in making better decisions regarding national and international insurance policy. I look forward to working with the Administration to move this legislation forward.”

The larger legislative package focuses on systemic risk throughout the financial services industry.

The proposed legislation would provide for greater regulatory oversight of “all of the largest, most interconnected firms,” according to a fact sheet released by the Treasury Department late Wednesday afternoon.

The legislative language says that the “sudden collapses of large investment banks and insurance companies based in the United States were among the most destabilizing effects of the financial crisis.”

“Under the president’s plan, all financial firms that are found to pose a threat to our economy’s financial stability based on their size, leverage and interconnectedness to the financial system will be subjected to strong, consolidated supervision and regulation,” said the Treasury Department statement. “These Tier 1 financial holding companies will be subject to consolidated supervision and regulation by the Federal Reserve regardless of whether they own insured depository institutions and will be subject to the nonfinancial activities restrictions of the Bank Holding Company Act.”

In addition, such Tier 1 financial holding companies “will be subject to stricter and more conservative prudential standards than those that apply to other bank holding companies—including higher standards on capital, liquidity, and risk management,” said Treasury. “These standards will be set with a focus on the risks that these firms could pose to the financial system as a whole, not just the risks to each institution."