Congress should prevent companies receiving help from federal aid programs from competing unfairly with companies that are not taking the money, a large trade group says.

The American Insurance Association, Washington, is making that case in a letter it sent to Congress Tuesday.

AIA President Marc Racicot, the signer of the letter, asks “that government ownership of private companies does not produce regulatory policy at the state or federal level that gives those institutions a marketplace advantage over their competitors.”

When an insurer receives federal aid, the government must act to ensure that providing this capital is not used for unintended purposes.

Using federal capital to take market share from financial institutions that are accessing private capital at market rates would create “a substantial risk of market distortion,” Racicot writes in the letter.

“Congress must exercise its oversight responsibility to ensure that the limited purposes of these initiatives do not result in outcomes that distort private markets and create conflicts with the government’s role as market regulator,” Racicot writes.

“There is a significant risk that the provision of subsidized government capital will perpetuate the view among companies that access to that capital is essential to keep pace with market competition,” Racicot adds.

Racicot refers directly in the letter to the Federal Reserve system’s “intervention with American International Group,” Federal Deposit Insurance Corp. initiatives, and programs set up under the Emergency Economic Stabilization Act, such as the Treasury Department’s $250 billion Capital Purchase Program.

Treasury officials say the CPP program will take equity stakes in qualified financial institutions.

A number of insurers have confirmed publicly that they have applied to participate in the CPP and other programs. It is believed that other insurers may have applied for the programs without disclosing their applications.

American International Group Inc., New York, appears to be the only insurer that already has received aid.

The number of companies and industry sectors now seeking access to government capital under EESA suggests that “institutions may feel compelled to participate in a dramatically discounted alternative to the capital markets,” Racicot writes.

If that happens, “the fundamental purpose behind these government programs gives way to the misperception that government is needed as a permanent market participant in order to maintain the level of competition, rather than to provide emergency stabilization of the economy as a whole,” Racicot warns.

In October, the AIA reported that a majority of member organizations surveyed said they did not support the inclusion of property-casualty insurers in the CPP and that those members would elect not to participate in the CPP if it were made available.

The AIA letter was sent to the chairmen and highest ranking Republican members of the Senate Banking Committee and the House Financial Services Committee, the congressional panels that have primary oversight over federal financial institution aid programs.