WASHINGTON (Bloomberg) - Lawmakers and regulators clashed over a proposal that could open the US insurance industry, now supervised by individual states, to federal regulation.

Jeremiah Norton, a Treasury deputy assistant secretary, told a House Financial Services sub-committee yesterday that the Bush administration endorses a plan to create an office within Treasury to offer advice on the insurance industry. The new office should also have the authority to negotiate international agreements on insurance issues, he said, so the US could speak with one voice instead of 50.

Republican Representative Donald Manzullo of Illinois called the plan an effort to take regulation out of the hands of the states.

"It just blows my mind," Mr. Manzullo said. "This is an attempt to federalise the insurance industry, that's all it is."

Federal regulation would end more than 135 years of supervision by states. The idea, which has been debated for two decades, gained attention this year as state regulators tried to engineer bailouts of bond insurers including Armonk, New York- based MBIA Inc. and New York-based Ambac Financial Group Inc. after losses tied to sub-prime mortgage markets.

Sub-committee chairman Paul Kanjorski said catastrophic national events including the September 11, 2001, terrorist attacks and Hurricane Katrina in 2005 revealed that the federal government lacks needed expertise on insurance policy. He said the government needs limited authority to preempt states on international issues.

"The establishment of an in-house informational resource to address these issues will ultimately help us to construct better policies, better rules, and better laws," Mr. Kanjorski said.

In addition to providing expert advice to the administration and Congress, Mr. Kanjorski said the office would establish federal policy on international insurance matters and have the authority to determine if state insurance rules were consistent with federal policies.

Insurance industry officials expressed concern that federal efforts to address international policies might result in meddling in state insurance issues. "We express extreme caution against preemption," Michael McRaith of the National Association of Insurance Commissioners told lawmakers.

Mr. Norton said he had some concerns about some aspects of the plans for the new office, including a provision in the legislation that would make it an independent agency. Mr. Kanjorski said the committee would be willing to continue talks with Treasury about his concerns.