Federal regulation of insurance, based on a proposal before Congress, would “roll back strong, state based consumer protections,” according to the nonpartisan group, Consumer Watchdog.

Reps. Melissa Bean (D-Ill) and Ed Royce (R-Calif.) recently introduced a bill seeking to create a federal insurance regulator through an Office of National Insurance, with offices in each state, and the opportunity for insurance companies and agents to choose between federal and state-based regulation and licensing. Insurance is regulated at the state level now.

Consumer Watchdog, a non-profit group that has been critical of proposed federal regulation of insurance, said Bean is one of the “top recipients” of insurance industry campaign contributions in the current Congress. Citing data from the Center for Responsive Politics, Consumer Watchdog said Bean received $358,603 in industry donations during the past two election cycles.

Carmen Balber

“The insurance industry’s effort to replace state oversight with federal regulation is a bait-and-switch to weaken regulation under the guise of embracing a new regulator,” said Carmen Balber of Consumer Watchdog. “The plan should be rejected out of hand in the wake of the federal financial regulatory failures.”

Balber added that “allowing insurers to pick their regulator, just like AIG did, will negate hard-won consumer rights laws and destroy state-based oversight. That web of state insurance laws, which the insurance industry has long decried as complicated and anti-competitive, withstood the test of fire by keeping insurance products and companies stable throughout this financial crisis.”

When American International Group fell last fall under the weight of its unregulated credit default swaps, its insurance operations remained strong. Most experts cite those insurance assets, which are now being sold off, as the means for AIG to pay back the nearly $170 billion in aid provided by the U.S. government.

The insurance industry has lined up on both sides of the proposal to create the Office of National Insurance, which is similar to a proposal introduced in Congress last year. That proposal died from inaction by legislators.