As senators on both sides of the aisle maneuver to turn the debate over financial services reform legislation to their political advantage, insurance industry lobbyists are working to carve out concessions that limit the bill’s impact on the industry.

The bill is S. 3217, the Restoring American Financial Stability Act of 2010.

These issues include winning a carve-out in the tough derivatives provisions of the legislation that would allow insurance companies to purchase custom derivatives tailored to the industry’s specific needs.

Moreover, a source said, no progress had been made in gaining a carve-out in the Democratic version of the legislation that would exempt insurers from language in the bill that would limit certain investment activities of financial companies, including deposit-taking banks. This provision was proposed by former Federal Reserve Chairman Paul Volcker and is supported by the Obama administration.

The provision would impact life insurers and mutual funds by barring financial institutions that own a bank from investing in or sponsoring a private investment fund or engaging in their own proprietary trading system.

A compromise amendment proposed by two Democratic senators provides an exception for proprietary investments on behalf of the insurance company, either through the insurer itself or an investment affiliate.

Some insurance companies with limited life insurance activities have accepted this proposed amendment, but insurance companies whose primary business is life, are seeking somewhat broader language, according to several insurance industry lobbyists.

At the same time, state insurance legislators and regulators are renewing their efforts to strike language in the legislation creating an Office of National Insurance within the Treasury Department.

Failing that, the legislators and regulators are seeking to limit the ability of federal officials to preempt state insurance laws.

There are also efforts by some state regulators and legislators to limit the impact of a provision of the Senate bill that would provide uniformity in regulation of surplus lines and reinsurance products.

Under these provisions, also contained in the House bill, all multi-state placements of surplus lines and reinsurance products would be governed by the rules of the state in which the transaction is placed.

According to officials at the Council of Insurance Agents and Brokers, the current language dealing with surplus lines and reinsurance “enjoys significant bipartisan support.”

As to the ONI, under the Senate bill this agency would have the authority to collect and analyze insurance data and prepare a study for Congress recommending the best ways to modernize the insurance system.

The Senate bill would also give the ONI the power to recommend which insurers should be supervised by the Federal Reserve, and to preempt state laws that it finds “inconsistent with international insurance agreements on prudential matters.”

It would also be given the authority to “perform such other related duties and authorities as may be assigned to the Office by the Secretary.”

At press time, Senate Democrats had failed to win support for a parliamentary provision that would limit debate on the legislation.

Democrats were seeking permission to limit debate on the bill to 30 hours. Efforts to win the 60 votes necessary to do so failed on April 26 and 27.

An insurance industry lobbyist said the Democrats “expect the efforts to fail until the third, fourth or fifth vote, when they will eventually get a Republican,” unless there is a deal between Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, and Sen. Richard Shelby, R-Ala., the ranking minority member, before then.

“In other words, the Democrats will keep up the political rhetoric and pressure,” the lobbyist said.

Republicans say they will seek to block floor action on the bill. Shelby said progress is being made, but that Republicans will stick together in order to gain greater leverage in continuing talks with Democrats on the substance of the bill.

“If we hang together on the floor, we can create critical mass,” he told a banking group.

But several industry lobbyists said last week that there was movement and the following several days would be crucial, indicating that work on a bipartisan bill could be completed shortly.

A key issue for Republicans is a provision now in the bill creating a resolution authority that would be used to wind down financial institutions found by federal regulators to constitute a systemic risk to the financial system.

Under the provision, financial institutions with assets of more than $50 billion would have to pay to pre-fund the authority.

However, as passed by the Senate Banking Committee in late March, only one insurance company, MetLife, would have to contribute to the pre-funding.

Democrats appear willing to compromise on the issue.

However, in acknowledging that the prefunding mechanism might be abandoned as part of a compromise, Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, said, “I don’t think there’s much doubt that there will be a bank tax.”

Insurers are voicing concern about the bank tax, which would impose a 15- or 16-basis point annual fee on institutions with assets of more than $50 billion, probably based on their assets.

Baucus is raising the issue as a contingency because the Congressional Budget Office is warning that the Senate reform package will be $17 billion in the red if Democrats drop a $50 billion industry-financed “orderly liquidation fund” opposed by Republicans.

An industry lobbyist said the so-called “TARP, or Troubled Asset Relief Program, tax will not be part of the financial services bill and will be considered separately as part of a tax bill.”

Regarding what’s known as the “Volcker rule,” the American Council of Life Insurers sent a letter co-signed by 22 CEOs of life insurance companies to all members of the Senate on the issue. The letter claims that the rule as presently written would cause “severe damage” to the basic model of life insurance holding company systems.

The industry supports language in the version of the legislation passed by the House in December. That bill leaves regulation of investment activities of companies that have depositary institutions up to regulators.

As to the derivatives provision, the ACLI, on behalf of the life industry, voiced concern with a tough derivatives provision proposed by Sen. Blanche Lincoln, D-Ark., chairman of the Senate Agriculture Committee.

The language was substituted for language in the original Dodd bill.

Effectively, the industry wants the language in the House version of the legislation, which provides a carve-out for insurers as “commercial users,” currently allowed only for airlines, manufacturers and others that use derivatives to manage the cost of raw materials.

The ACLI letter said “life insurers should be included within the end-user exemption from the mandatory clearing requirement.”

Since life insurers use derivatives to manage the risks of their assets and liabilities through prudently collateralized hedging transactions, they should be treated in the same manner as other non-speculative end-users in the legislation,” the letter said.

Regarding the efforts of state legislators and regulators to narrow or strike the language creating the ONI, the National Council of Insurance Legislators says that establishing the new office, “by inserting a federal presence into the regulation of insurance–seeks a solution to a problem that does not exist.”

The letter says state regulators fear such an office “would preempt state law and eventually threaten successful state insurance oversight.”

The letter adds, “As has been evidenced and attested to over and over again, and despite the wishes of those who would seek to avoid the protections of state regulation, insurance regulation did not contribute to the crisis and does not need federal intervention.”

As to the preemption authority on foreign agreements, David Snyder, associate general counsel of the American Insurance Association, maintained that such authority is essential.

“The U.S. needs a strong national voice to represent the industry on international issues,” Snyder said.

“We simply don’t have that power today,” he added. “That costs premiums to our companies and jobs for the U.S. economy.”

Charles Landgraf, a partner at Dewey & LeBoeuf, LLP. in Washington, D.C. who represents Lloyd’s of London in the U.S. says it is essential that the reinsurance industry have a national presence.

“These issues are inherently global and transnational,” Landgraf said. “They are mixing and matching risks in different markets.”