WASHINGTON BUREAU — When the House Financial Services Committee considers a systemic risk regulation bill Tuesday, it should rewrite the sections governing how much authority federal regulators would have over large, troubled insurers, insurer groups say.

Frank Keating, president of the American Council of Life Insurers, Washington, has written a letter to committee leaders asking them to pare back the “resolution authority” given to federal regulators by the Financial Stability Improvement Act of 2009 “discussion draft.”

Leaders of the American Insurance Association, Washington, and the Property Casualty Insurers Association of America, Des Plaines, Ill., also have asked committee leaders to revise the resolution authority provisions.

Designating insurers as “potentially systemically risky” could weaken policyholder protection rules and programs, insurer group leaders write.

If the draft were implemented as written, policyholders, beneficiaries and other individuals who rely on life insurance payments and proceeds would lose their policyholder claim priority, Keating writes.

Variable life and annuity contract holders would be denied the benefits of separate account insulation, because the kind of receivership or conservatorship envisioned in the discussion draft would treat all creditors the same, Keating writes.

“Traditional life insurance policyholders may lose the benefits of the state insurance guaranty system entirely,” he adds.

The FSIA discussion draft would give the Federal Reserve System, the Federal Deposit Insurance Corp. and a Financial Services Oversight Council broad authority to deal with problems at financial institutions, including non-bank financial institutions such as insurers, that are “too big to fail.”

“The legislation opens the door for oversight of insurance holding companies by the Federal Reserve, and FDIC resolution of insurance holding companies in financial trouble,” according to one Washington law firm’s analysis of the draft. “Any activity or practice that is designated as posing a systemic risk also gives rise to Fed oversight. The language is very broad and could, conceivably, cover many insurance activities, notably reinsurance.”

Because the FSIA draft would not pre-empt state laws, it could lead to regulatory overlap, the law firm contends.

Keating writes in the ACLI letter that clear firewalls are need to protect the integrity of the functional regulation of insurance operating subsidiaries.

“The discussion draft legislation would seemingly allow the FDIC to take any action it deemed necessary regarding the assets of a ‘Covered Financial Company’, no matter the impact for an operating company,” Keating writes. “There also is no assurance that functional regulators (particularly and especially state regulators) will even be consulted.”

Lawmakers should ensure that “a healthy life insurance subsidiary is not stripped of its assets to bolster a holding company parent, to the detriment of the policyholders of the life insurance subsidiary,” Keating writes.

Keating asks lawmakers to exclude mutual and fraternal life insurers from the definition of “Financial Company,” and to preserve existing state consumer-protection laws, such as laws that require state regulatory approval prior to the payment of large, extraordinary dividends by an insurance company to its parent.

“Also, state insurance solvency laws that provide policyholders with a higher priority of claims distribution than unsecured general creditors should be preserved,” Keating writes.