NEW YORK (Bloomberg) - President Barack Obama's plan to create a US insurance office after the $182.5 billion bailout of American International Group Inc. (AIG) may take powers from the states that have overseen the industry for more than 135 years.

Obama called for the creation of a federal Office of National Insurance within the Treasury Department to monitor the industry, represent US interests in international insurance agreements, and look for gaps in state oversight. The proposal was announced this week as part of Obama's planned overhaul of the US financial regulatory system.

The administration endorsed broader federal oversight of firms posing a threat to the financial system, and said more regulation may be needed for parts of companies outside the reach of state supervision. AIG's financial products unit, which brought the company to the brink of bankruptcy after it sold credit protection to firms including Goldman Sachs Group Inc., was not under the states' umbrella.

"AIG highlighted gaps in our insurance regulatory system," said Leigh Ann Pusey, president of the American Insurance Association, which has pushed for federal oversight for a decade. "We had 20 different states with authority over 72 insurance subsidiaries of AIG just in this country." The states did not work together "until the crisis hit", she said.

The creation of a federal regulator is supported by some of the country's largest insurers, including Allstate Corp. and Travelers Cos. Some smaller firms are opposed. The National Association of Mutual Insurance Companies, a trade group for policyholder-owned companies, said in a statement it had "concerns with some of the language in the draft paper" released by the Treasury to coincide with Obama's announcement.

The Obama plan echoes a proposal from former Treasury Secretary Henry Paulson, who said in his last year on the job under President George W Bush that insurers should be allowed to choose between state and federal regulation.

State overseers have focused on issues important to local residents. In Florida, the state with the most property vulnerable to hurricane damage, commissioner Kevin McCarty investigated why rates paid by homeowners were higher than projected. In New York, superintendent Eric Dinallo ruled that gay couples legally wed in other states are entitled to equal treatment by insurers.

The Treasury said in its policy paper this week it would back either a federal charter or "effective action by the states" to fix the existing system, which it called "highly fragmented, inconsistent and inefficient". Therese Vaughan, CEO of the National Association of Insurance Commissioners (NAIC), agreed that the industry needs better oversight.

"That is something we have called for ourselves, that we are working hard to get to," said Ms Vaughan, whose group of state insurance regulators has opposed efforts to reduce their responsibilities.

"We look forward to continuing to work on that and to increase the uniformity and efficiency in our state- based system without losing our inherent strengths," she said yesterday on a conference call with reporters.

The NAIC has assembled a compact that allows insurers to sell life insurance in any of 36 participating states once regulators in one state have approved the policies.

Ms Vaughan said she was skeptical of claims that any insurer was a risk to the broader financial system. AIG lobbied for an expansion of its government bailout by telling regulators the company's collapse could cripple money-market funds, force European banks to raise capital and cause competing life insurers to fail.

"I cannot point to a single insurance company that I believe is systemically risky," Ms Vaughan said.

"We do know that insurance companies can be part of larger institutions that may be systemically risky. So we have to find a way to fit into this structure, and I think it takes a very balanced approach."

Representative Melissa Bean, an Illinois Democrat, said AIG's collapse illustrated the problems of insurers with holding companies outside the reach of state overseers.

Ms Bean has proposed legislation to create a national regulator that is optional for most insurers and mandatory for companies judged to pose a risk to the broader system.

AIG's government rescue includes an investment of as much as $70 billion in preferred stock and warrants, $52.5 billion to buy mortgage-linked assets owned or backed by the insurer, and a $60 billion credit line.

"This was an unprecedented level of federal commitment of taxpayer dollars without any oversight or authority, and that makes everyone uncomfortable," Ms Bean said in an interview. "Without the holding company data and the insights and expertise at a federal level, we can't anticipate what those systemic risks might be in the industry."

Hartford Financial Services Group Inc. and Lincoln National Corp., two life insurers, agreed this month to take more than $4 billion from the Treasury's rescue fund between.

The insurance proposal is part of Obama's larger plan to set up an agency that oversees consumer financial products, brings hedge funds and private equity firms under federal supervision for the first time and widens the US Federal Reserve's power to monitor large firms.

The president's announcement of the proposal marked the beginning of a congressional process that may alter his plan, with some lawmakers opposing any expansion of the Fed's power.

Obama, who has called the "sweeping overhaul" of regulation one of his domestic priorities, said he wants to sign legislation by year-end.