April 16 (Bloomberg) -- A congressional panel will hear testimony today on a plan endorsed by Treasury Secretary Henry Paulson and Allstate Corp. that would simplify industry regulation and eliminate most oversight by the 50 U.S. states.

Insurers would set their own prices under federal supervision, rather than negotiate with each state's regulators, under the proposal being scrutinized by the House Financial Services committee's insurance subcommittee. Companies say the market would force them to charge competitive prices, while opponents warn that industry oversight will be compromised.

An almost two-decade-old proposal for federal insurance oversight gathered new momentum when Paulson included the idea in a plan to overhaul U.S. financial regulation last month. House and Senate versions of the plan are unlikely to become law in a legislative season shortened by elections scheduled for November, said Leigh Ann Pusey of the American Insurance Association.

``I don't know that the legislative process has the time in an election year to really yield a final product, but I think we'll make some headway,'' Pusey, the senior vice president for government affairs at the trade group, said in an interview. ``It'll happen sooner than people think.''

The so-called optional federal charter legislation has the support of companies including State Farm Mutual Automobile Insurance Co. and Allstate, the two biggest U.S. home and auto insurers. Some smaller companies and the current regulators say a switch isn't a guarantee of less bureaucracy.

150 Years

``The states have done a remarkably good job in the last 150 years,'' New York Insurance Superintendent Eric Dinallo said in an interview on Bloomberg Television. ``Consumers are very protected. State regulators and the insurance industry ought to be very proud of what is a very stable regulatory regime, but it needs to be improved.''

Dinallo is scheduled to testify today in front of a Financial Services insurance subcommittee on behalf of the National Association of Insurance Commissioners, the umbrella group for state regulators. Officials from the Treasury Department and four trade groups are also on the witness list.

``With all due respect to many of the leaders at the NAIC, I think they are structurally and functionally incapable'' of overseeing broad insurance reform, Pusey said. ``They are a trade organization of insurance regulators and they don't have the authority or the structure to oversee this, much less the expertise to do this on a national basis.''

Paulson's 218-page ``Blueprint for Regulatory Reform'' says the optional federal regulation would have a structure similar to the current dual-chartering system for U.S. banks. This is the first time any administration has proposed federal insurance regulation, according to a statement from the Washington-based Council of Insurance Agents & Brokers, which supports the plan.

The federal regulator would oversee insurer advertising, unfair treatment of policyholders and other consumer protection issues, according to the blueprint. It would work with states in some areas, such as unfair claims practices and fraud.

The House bill is sponsored by Representatives Melissa Bean, a Democrat from Illinois, and Ed Royce, a California Republican.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: April 16, 2008 00:01 EDT