WASHINGTON (Reuters) ? State-based regulation of the US insurance industry is not working and the latest round of scandals among insurers proves it, say critics, but Congress is at a standstill over possible reforms.

Investigations of wide-ranging abuses are rocking the $4-trillion insurance business, but on Capitol Hill, little is happening due to long-standing disagreement over which way to take any overhaul of the present system.

Based on the McCarran-Ferguson Act of 1945, the insurance industry is regulated by state-level officials. There is no central authority in Washington policing insurers.

The problem is that ?state regulators have missed almost every consumer fraud there has ever been in the insurance business,? said Martin Grace, professor of risk management at Georgia State University in Atlanta.

?But would the federal government do any better? That?s an open question,? Grace said.

The latest insurance scandals cloud the outlook for giants such as American International Group Inc., Aon Corp. , Marsh & McLennan Cos. Inc., Berkshire Hathaway Inc?s. General Re unit and numerous offshore groups.

Allegations of misconduct range from bid rigging to questionable accounting involving offshore ventures. Enforcement action by the US Securities and Exchange Commission is under way and may reshape specific lines of the insurance business. But a comprehensive overhaul of industry regulation is far beyond the SEC?s reach. Moreover, SEC insiders say, the agency has no desire to take on the job.

In Congress, two basic reform approaches have been debated for years. One ? proposed by Ohio Rep. Michael Oxley and Louisiana Rep. Richard Baker, both Republicans ? would largely preserve the existing state-based oversight system, but impose more uniformity on it and deregulate insurance pricing.

Another approach ? favoured by most large insurance companies, but not by Oxley and Baker ? would let insurers seek an optional federal charter, opening the door to Washington oversight and perhaps a new federal agency.

State insurance commissioners, who have their own lobbying group in Washington, have criticised the Oxley-Baker proposal and the federal charter idea. Instead, they are pursuing a voluntary system of coordination among state authorities.

Consumer advocates oppose the Oxley-Baker plan, saying it would hurt consumers by dismantling price controls.

Consumer Federation of America Director of Insurance Robert Hunter has called on Congress to let the Federal Trade Commission probe the insurance industry on antitrust grounds.

At the very least, Hunter said, the recent scandals suggest ?there should be a federal look at this thing.?

The AIG scandal, as well as an earlier one involving Marsh & McLennan, were largely brought to light by New York Attorney General Eliot Spitzer, a Democrat who is running for governor.

At a Senate hearing in November, Spitzer said: ?The federal government?s hands-off policy with regard to insurance, combined with uneven state regulation, has not entirely worked.?

He called on Washington ?to assure some basic standards of accountability on the part of insurance professionals?.

But, sounding a refrain often heard from state officials, Spitzer added: ?The federal government should not pre-empt state insurance enforcement and regulation.?

Oxley and Baker have conducted more than a dozen hearings in recent years on insurance reform and continue to work on it. ?State officials have generally opposed any increased federal involvement in this area and as of late have resisted even the most modest proposals,? said Oxley spokeswoman Peggy Peterson.