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CHICAGO-State insurance regulators are stepping up their efforts to protect their turf from federal authorities who envision closer ties between banks and insurance as the future of financial services.

The state regulators are pursuing recognition and a role in financial services talks in Washington by marching under a banner of consumer protection.

However, at least two consumer representatives would rather see insurance regulators focus on helping with urban needs.

Signs of regulators' anti-federal campaign were evident throughout the summer quarterly meeting of the National Assn. of Insurance Commissioners last week in Chicago. The most visible sign of this were round, red-edged stickers the NAIC distributed urging registrants to stop federal insurance regulation.

The stickers were part of a broad campaign outlined by a Washington, D.C., public relations-but not lobbying-firm the NAIC has hired to help it get its message across, NAIC President Josephine Musser of Wisconsin said in an interview.

The perceived federal threat comes in the form of several proposals pending in the U.S. Congress, specifically House Resolutions 10, 268, 669 and a Department of Treasury proposal that contain provisions pre-empting state regulation of bank's insurance activities. In addition, the Comptroller of the Currency has proposed separate federal regulatory oversight of bank's insurance activities.

The NAIC's message is a simple one, Ms. Musser said in an NAIC newsletter: "State insurance regulators have been successfully safeguarding consumers and meeting the needs of the ever-changing market conditions for over 125 years. With such expertise and ability, there is no doubt that states-not the federal government-should regulate the business of insurance. States do it best, so let the states continue to do it!"

In her opening speech, she reiterated state regulators' support for the integration of financial services as long as states retain a key role in solvency oversight of entities providing insurance.

Wisconsin Gov. Tommy G. Thompson, who appointed Ms. Musser, repeated the theme during a speech he delivered at a meeting of the NAIC's Special Committee on Banks and Insurance. "The states have the skills," he said. "We must work to preserve the laws and the regulations designed to keep consumers safe from unscrupulous operators."

The federal proposals would violate the constitution's guarantees of states' rights and powers, Mr. Musser added.

Kentucky Insurance Commissioner George Nichols III, who chairs the NAIC's banking committee, said he also voiced that theme during testimony last month before a U.S. House Committee.

The NAIC supports functional regulation and opposes the pre-emption of state laws, he said. "We must deliver the message to the Comptroller of the Currency that it is not right to pre-empt state law. Our laws are enacted by legislatures and signed by governors, duly elected representatives of the people."

State insurance regulators are particularly concerned about the Department of Treasury bill that would establish a National Council on Financial Services with rule-making power, according to a letter sent to the secretary of the Treasury and chairman of the House Banking Committee by the NAIC, the National Conference of Insurance Legislators and the National Conference of State Legislatures.

In related action at the summer meeting, state regulators moved up consideration of the need for a mutual insurance company model act and related proposals, spurred apparently by Congress's interest in the topic.

However, two consumer spokes-women, whose attendance at the meeting was funded by the NAIC, voiced their concerns at the meeting about the insurance industry's general lack of involvement in helping solve urban needs, in contrast to banks' greater participation under the federal Community Reinvestment Act.

Sonia Alleyne of the Massachusetts Affordable Housing Alliance in Dorchester, Mass., expressed concern about a lack of insurer investment in communities and urged support for a bill pending in her state that would require greater insurer involvement.

Selwyn Whitehead of The Economic Empowerment Foundation in Oakland, Calif., said she, too, was concerned with an inadequate response by state regulators to allegations of insurance red-lining in urban areas.

The NAIC*is likely to solicit support from such consumer groups in its fight against federal regulation. "We must mobilize and coordinate our allies," including consumers, insurers and related organizations, Ms. Musser said in her opening speech.

"If we fail to secure a seat at the table when these decisions on what the road of financial modernization should look like are made, if we neglect to be heard at every significant step in the process, we will lose and more importantly, consumers will lose," Ms. Musser said.

"State regulators may face the biggest threat of federal pre-emption of state regulation than they have since the early 1990s when Rep. John Dingell took on state regulation on the issue of solvency surveillance," said Lenore Marema, vp-legal and regulatory affairs for the Alliance of American Insurers in Schaumburg, Ill.

In other action at the meeting, state regulators:

Approved on a 35 to 15 vote, with one abstention, several changes to its budget policy, which the NAIC has already begun implementing.

The NAIC, which now has about a $40 million annual budget, will incorporate a program-based approach to budgeting, rather than a lump-sum approach. It also will identify and minimize instances in which insurer-provided database fees subsidize NAIC programs that are not related to solvency regulation, according to the one-page resolution.

In addition, the NAIC agreed that by the 1998 fiscal year it would move away from its extensive, multi-tiered fee schedule based on insurer premium volume toward a more traditional, cost-of-service-based fee schedule.

The changes, which insurer critics have pushed for several years, are designed to rein in the growth of the NAIC and focus its efforts primarily on solvency.

Recertified four state insurance departments-Colorado, Minnesota, North Dakota and Virginia-for maintaining high financial solvency standards required under the NAIC's accreditation program. Recertification, which is good for five years, was previously approved for Iowa, Kansas, North Carolina, Ohio and South Carolina.

Voted to formally approve two, new model acts that would allow states adopting them to prohibit life and disability insurers from using information about spousal abuse to discriminate in underwriting the subjects of abuse. The NAIC last year protected such persons from discrimination by health insurers and is considering extending those protections to property/casualty insurers.

Delayed a formal vote on adopting a white paper on the use of credit reports in underwriting.

Gave interim Executive Committee approval to a new risk-based capital formula for health-related organizations, such as certain managed care entities.

The formula is designed to safeguard consumers by assuring that such an organization has minimum amounts of capital necessary to provide an adequate cushion to protect its financial stability, given its size and type of risk. The NAIC previously adopted a similar RBC approach for property/casualty and life/health insurers.

Learned that a new New Hampshire law rescinds that state's participation in the Interstate Insurance Receivership Compact, which began in 1995. New Hampshire Gov. Jeanne Shaheen explained the decision by saying that it was in the best interest of her state. The remaining compact members are Illinois, Michigan and Nebraska.

Released an alternative, prudent person-type model investment law for insurers and set a Sept. 10 deadline for comments.

Continued work on proposals that would deregulate commercial lines of insurance and would establish "seamless" trans-border insurance transactions primarily for truckers traveling between the borders of Mexico, the United States and Canada.