WASHINGTON (Reuters) ? Two United States senators proposed a bill that would overhaul insurance regulation in the US by giving companies the option of federal rather than state supervision.

Insurance is currently regulated by the 50 states. But the bill would create a two-tiered regulatory structure for the industry, much like the nearly 150-year-old dual banking system that has been credited with fostering competition and innovation in banking.

While the legislation has been long sought by some big insurers, the industry remains divided on the question of an optional federal charter.

What?s more, there appears to be little appetite on Capitol Hill to create a new federal regulatory agency and its associated bureaucracy, some congressional staff and lobbyists said.

The bill?s sponsors recognised such hurdles, but said reform of insurance regulation is long overdue and the bill?s introduction at least puts the issue on the table. ?The existing governing system spreads across more than 50 jurisdictions and has proven burdensome and expensive for all concerned,? said Republican Sen. John Sununu of New Hampshire.

?A more uniform regulatory environment mirroring the highly successful dual banking system is long overdue and stands to substantially improve the environment for those who buy, sell, and underwrite life and property and casualty insurance.?

Under the bill, sponsored by Sununu and Democrat Sen. Tim Johnson of South Dakota, insurers opting for a federal charter would fall under US law and be regulated by a newly created agency under the US Treasury Department.

Insurers, however, could choose instead to keep their state charters and continue to abide by state laws and regulations.

The Senate Banking Committee plans to hold a hearing on insurance regulation as early as May, a spokesman said. Many insurance companies have urged Congress to give them an optional federal charter or a national standard for regulation, saying compliance with dozens of differing laws is too costly and burdensome.

Allstate Corp., one of the biggest US insurers, for example, has repeatedly urged Congress to create an insurance regulatory environment like the dual banking system.

The American Insurance Association, which represents about 400 major insurance companies providing all lines of property and casualty insurance, backed the Sununu-Johnson bill, saying it would create a ?streamlined, rational regulatory system? that would increase efficiency.

?Consumers will be empowered by this legislation because it would create a healthy insurance environment that fosters increased competition and product innovation, rather than the present patchwork state regulatory system, which has not kept pace with the marketplace needs of the 21st century,? said Marc Racicot, the group?s president and a former Montana governor.

But another trade group representing some 1,000 companies in the property/casualty sector, the Property Casualty Insurers Association of America, said it supports state regulation because states are closer to the needs of the market.

?PCI remains concerned about the establishment of a new federal bureaucracy with far-reaching authority over the insurance industry that is subject to the political whims of Congress,? said Ernie Csiszar, president and chief executive officer of the group.

Insurance agents, who shop policies from many insurers to consumers, oppose the federal charter option. They say it would increase, not decrease, their regulatory burden.

Both PCI and the Independent Insurance Agents & Brokers of America prefer an effort underway in the House to modernise the state-based regulatory system that would set federal standards and force states to update certain areas of regulation.

But Sununu said forcing states to enforce national standards could yield ?unintended consequences.?

?I don?t know of many situations where that model has worked effectively,? he told reporters.

The Treasury Department would not pick a side, saying through a spokeswoman that it is looking at all ideas.