WASHINGTON—Property/casualty insurance trade groups may not agree on everything, but they're unanimous in arguing that they should not be subject to heightened supervision by the Federal Reserve under the new financial services regulatory reform law.

In comments filed this month with the Treasury Department in response to the Financial Stability Oversight Council's notice of proposed rulemaking, property/casualty trade groups argue that property/casualty insurers do not present a systemic risk to U.S. financial stability.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a nonbank financial company must be found by the Financial Stability Oversight Council to pose a threat to the stability of the United States through either financial stress or ongoing activities for the nonbank company to be subject to heightened regulation and supervision by the Federal Reserve Board.

In addition, trade groups filed comments regarding how the Volcker Rule contained in the Dodd-Frank Act should be applied to property/casualty insurers. The rule prohibits banks from engaging in proprietary trading and from making certain investments. But Congress specifically excluded investments of a state-regulated insurance company and its insurance affiliates from the rule in order to avoid duplicate regulation. Insurers wish to remain excluded from the Volcker Rule.

In a filing dated Nov. 5, the American Insurance Assn. urged the council to conduct a two-stage analysis to determine whether a company could present a systemic risk. The council first would determine whether a company could generate systemic financial instability.

“If, as a result of the council's external impact analysis, a nonbank financial company comes under closer scrutiny, the council should next evaluate those factors that go to the internal financial structure of the institution to determine the potential for material financial distress that could pose a threat to U.S. financial stability,” the AIA wrote.

“Under our two-step analysis, the first stage is really critical,” J. Stephen Zielezienski, AIA senior vp and general counsel, said in an interview last week. “AIA believes the council must consider the sector-specific context of any nonbank financial company, including the nature of its financial activities, the business model that's utilized in that sector, the relationship between firms in that sector, and the larger financial system and the extent of regulatory supervision applied to that sector's market participants.

“It's our view that if you conduct that analysis and you look at property/casualty companies that are engaged in traditional insurance activities, that the council will conclude that none of those companies could generate financial instability,” he said.

In its filing, the Property Casualty Insurers Assn. of America said the council should avoid being “overly inclusive” in any designations concerning systemic risk. “Incorrect designations will lead to impaired market efficiency and resource allocation and increased moral hazard,” PCI wrote.

“We had a lot of discussions with the federal regulators and Treasury throughout this debate,” said Robert Gordon, PCI senior vp-policy and research development, in an interview. “The regulators prefer to be overinclusive rather than underinclusive.”

“There's been a tendency to resort to size as a potential measurement for systemic risks,” Mr. Gordon said. “Particularly in the property/casualty industry, you can have relatively large companies with no significant indicia of systemic risk. For example, we have demonstrated early that even a very large auto insurer would not have any systemic impact if it failed.”

The Reinsurance Assn. of America also argued that reinsurance does not present a systemic risk for a variety of reasons. These include the relative smallness of reinsurers compared with other financial institutions; that reinsurers—like insurers but unlike banks—pay out claims over a long period of time; and the fact that “following any major event in which reinsurers suffer heavy losses, capital flows into the industry.”

Regarding applying the Volcker Rule to property/casualty insurers, the National Assn. of Mutual Insurance Cos. wrote that it would increase insurance prices.

Eliminating insurers' ability to invest premiums in anything other than low-yield government securities would mean higher prices for consumers, NAMIC said in its filing. “Core insurance investment practices” did not present a significant risk to the U.S. economy during the economic crisis “and are not considered to be a contributing factor to systemic risk” in the future.

Comments on both provisions of the Dodd-Frank Act can be found at www.regulations.gov.