Jurisdiction over insurance regulation should remain with the states, and switching to an optional federal insurance charter system would be tantamount to deregulation, a consumer group writes in a letter sent to U.S. Treasury Secretary Timothy Geithner.

“Recently, a few members of Congress wrote you urging the creation of an office or position responsible for insurance oversight in the Department of Treasury,” Consumer Watchdog, Santa Monica, Calif., writes in the letter. “The request is couched as part of a regulatory overhaul of the financial markets. While the need for a financial regulatory overhaul is clear, it should be not used as a stalking horse for insurance deregulation.”

The letter was announced on the same day that Reps. Melissa Bean, D-Ill., and Ed Royce, R-Calif., said they would sponsor a bill that could create a federal Office of Insurance Regulation.

Consumer Watchdog–formed by Proposition 103 organizer Harvey Rosenfield, and formerly known as Foundation for Taxpayer and Consumer Rights–notes that Bean and Royce have written a letter seeking federal oversight.

The true aim of those who seek federal oversight is to avoid stringent state regulations, Consumer Watchdog says.

“Supporters of this plan are not seeking greater federal regulation,” Consumer Watchdog writes. “To the contrary, their purpose is to allow insurers to escape oversight. Proponents have made no secret of the fact that they consider an insurance office at Treasury to be a vehicle for limiting the role of the states in the insurance marketplace.”

The letter cites insurance regulation initiatives in California, such as Proposition 103, as examples of the kind of strict state regulation that proponents of an OFC are trying to avoid.

The 103 ballot initiative, passed in 1988, restricted insurance rate increases and underwriting in the state.

Insurers should not be able to choose between state and federal regulation, Consumer Watchdog writes.

Consumer Watchdog adds that state regulation helped ease the effects of the current economic crisis on insurers.

“Allowing insurers to select which standards apply to them will result in the negation of hard-won consumer rights laws and destroy the state-based oversight that set insurance products and companies apart from much of the financial sector during this period of extraordinary upheaval,” the group writes.

Consumer Watchdog challenges the assertions of OFC proponents that the case of American International Group Inc., New York, demonstrates the need for federal regulation.

“The company’s insurance units remained generally healthy in a reeling economy because of strong state regulation, even as its federally overseen holding company nearly destroyed the conglomerate,” Consumer Watchdog writes.

But Consumer Watchdog would not oppose the collection of data by the federal government to build expertise on the national insurance market, the group says.