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For more than 150 years, the states have individually regulated insurance companies and the products they offer. But increasing frustration with that system – and pressure from the insurance industry – could prompt Congress to create an insurance regulatory agency within the Treasury Department as early as next year.

That would be good news for insurers such as Principal Financial Group Inc., which say enacting an optional federal charter would allow them to bring new insurance and other financial products to market faster and enable them to better compete globally.

However, a group representing more than 8,000 independent insurance agents in Iowa says state regulation works well, and that having a federal regulator would confuse consumers and make it more difficult to resolve complaints.

Merle Pederson, Principal’s government relations vice president and counsel, was among the insurance executives who helped craft the original National Insurance Act about six years ago. He’s a patient man.

“As each year goes by, Congress seems more and more willing to look into, and even act on, direct insurance regulatory matters that historically they never touched because that was the province of state insurance regulators and state legislatures,” he said. “But increasingly, I think members of Congress see insurance, rightfully so, as one piece of the larger financial services industry. So they have over time become much more willing to venture into insurance regulatory matters.”

Congress reaffirmed the primacy of state regulation in 1945 when it passed the McCarran-Ferguson Act, and again declared states as the primary regulators with the Gramm-Leach-Bliley Act in 1999. But an increasingly global financial services industry is challenging that model.

A recently proposed overhaul of the financial markets added new fuel to a simmering debate. Part of U.S. Treasury Secretary Henry Paulson’s Blueprint for Financial Regulatory Reform calls for the creation of an Office of Insurance Oversight, which would regulate insurers that opt to be federally chartered.

Earlier this month, the U.S. House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises convened the third in a series of hearings on insurance regulatory reform. Also this month, the National Association of Insurance and Financial Advisors (NAIFA), which had been a longtime supporter of the current state-based regulatory system, announced that its board had voted to recommend support for an optional federal charter. The recommendation is subject to approval by NAIFA’s national council when it meets this fall.

When it comes to federal oversight, “everybody better be real careful what they wish for,” said Bob Skow, chief executive officer of the Independent Insurance Agents of Iowa Inc. “You’ll have California, Texas and Florida teaming up to regulate insurance and passing their problems on to us.”

A better solution, Skow said, would be to pass minimum federal standards that each state would have to meet. The Independent Insurance Agents & Brokers of America supports a bill introduced in March known as the NARAB Reform Act. That measure would streamline nonresident insurance agent licensing, according to an association release.

Skow said consumers would also find regional federal consumer affairs offices far less responsive than state insurance departments.

Iowa Insurance Commissioner Susan Voss said having two types of charters would be “very confusing for consumers.”

“They’re going to be very upset about it,” she said. “A lot of people already have health care covered by the federal government, and they have a hard time getting assistance.”

The state’s other stake in the issue: Insurers pay more than $120 million annually in premium taxes into the general fund.

“Whether that money would go away if there’s a federal regulator remains to be seen, because the bill just says that the regulation will be paid for by fees from the industry,” Voss said. “Well, I can’t imagine the industry wanting to pay money to both the state and the feds if you’re only going to be regulated by the federal government. … If you’re continuing to pay taxes to a taxing body (the states) and not really being regulated by that taxing body, that doesn’t make a lot of sense.”

Much of the push for an optional federal charter has emerged from insurers’ frustrations with states that have failed to get on board with national agreements, Voss said. Iowa was among the first states to enter into the Interstate Insurance Product Regulation Compact, which has been approved by 31 states and is pending in nine others. However, large states such as California, New York and Florida have not signed the compact.

In Florida, for instance, “they have a very strong independent insurance agents’ association,” Voss said. “They don’t want people coming from Iowa to sell insurance, so they don’t care if they have reciprocity. So, unfortunately, it’s things like that that feed into the frustration of our industry and our agent community to say, “If we can’t get it done at the state level, let’s just go to the feds.'”

Des Moines-based American Republic Insurance Co., which sells individual health and Medicare supplement policies in 35 states, supports the concept of an optional federal charter, said Mike Fitzgerald, the company’s general counsel.

“One of the advantages of the federal charter is that it’s just one set of rules to understand and comply with,” he said. “It’s really not a concept of more regulation, but perhaps a different kind of regulation than you have now.”

Fitzgerald said the regulatory process is reasonable in most states. “There are some states that are difficult to deal with, and that’s why we don’t do business in all states,” he said.

Pederson said allowing insurance companies to be federally chartered would increase efficiency and ultimately lower costs, because companies wouldn’t have to wait for each state insurance department to approve new products. That process can take longer than a year in some states, among them California, he said. In other instances, states simply won’t approve new products. California hasn’t approved a new disability insurance product for several years, he said.

Federal charters also would put insurance companies on a more level footing with mutual fund companies and banks, each of which enjoy the speed to market that having one federal regulator provides, he said. The industry also needs one national regulator to represent its interests abroad, Pederson said.

“We believe that just as the regulation of securities and banking has been modernized over the years, insurance regulation needs to be modernized,” he said. “Insurance is certainly an important third leg of the financial services industry in this country and globally. This is not an indictment of state insurance regulators, but the states simply cannot represent our industry when it comes to international trade and regulatory matters around the world.”

With Congress and the Bush administration dealing with the war in Iraq and anticipating the presidential election, Pederson said no one expects action on the National Insurance Act this year. “We would like to see significant movement toward passage in 2009; that’s a more realistic time frame,” he said.

Voss said both Sen. Chuck Grassley and Sen. Tom Harkin have indicated to her that the National Insurance Act legislation won’t move forward in Congress this year.

“It’s just going to keep bubbling,” she said. “This is a very strong industry that’s very dedicated to this issue, and we’re going to continue to talk about it. It’s not going to go away. … The good part of that is it’s going to keep us on our toes.”