In a departure from the traditional industry position, a major insurance trade group yesterday told Congress that it would accept federal regulation if that turned out to be the best way to ensure the industry's financial health.

"We remain concerned that solutions to all the shortcomings of the current insurance regulatory system may not be available on a state-by-state basis. ... The limitations of 50 separate entities attempting to regulate a business that often operates in a national or international arena may necessitate some federal involvement ... ," Robert E. Vagley, president of the American Insurance Association,told the House Oversight and Investigations subcommittee. AIA represents major property-casualty insurance companies across the nation.

Vagley emphasized, however, that the AIA believes that deficiencies in the current system of state regulation can be corrected with minimal federal involvement and that state regulation need not be abandoned.

"We are convinced that, on the whole, it works well," Vagley said.

Nevertheless, Vagley acknowledged that many will view federal regulation as "the camel's nose under the tent," but he said he does not think AIA's suggestions would lead to "a {U.S.} Insurance Department on Constitution Avenue," though he conceded that "20 years from now, who knows?"

Oversight subcommittee Chairman John D. Dingell (D-Mich.) praised Vagley and the AIA lavishly and welcomed their openness to a new federal role in regulating the insurance industry.

The shift on federal involvement is a major one. The insurance industry has spent millions of dollars over the years lobbying to keep the central government out of insurance regulation. It has traditionally insisted that state regulators do a better job, and that federal involvement would lead to an unneeded giant bureaucracy. Most recently, the industry has been struggling to preserve its longstanding exemption from federal antitrust laws provided by the McCarran-Ferguson Act.

The AIA stance was endorsed by some agent organizations, but groups representing companies that deal in health and life insurance remained steadfast on the issue.

"We still oppose federal regulation," said a spokesman for the American Council of Life Insurance, which represents life insurance companies. The life insurance industry "remains strong" and regulatory problems within the current system "are isolated," he said.

The Health Insurance Association of America's position "has always been that we believe that the states can do an effective job of regulating the insurance industry and that's the appropriate mechanism for doing so," a spokeswoman said.

Property-casualty insurers are under severe political pressure at the federal level following the spectacular collapse of several large companies in the past several years. Although there has not yet been any cost to taxpayers, the specter of another savings-and-loan-type debacle has led several congressional panels to begin probing the safety and soundness of the industry.

At the same time, regulators and voters in a number of states -- New Jersey, Pennsylvania and California among them -- have been demanding that companies lower premiums for auto insurance.

AIA yesterday accused these states of being more interested in lowering rates for consumers than in ensuring that the insurance companies don't go broke. State actions that force insurers to write coverage at below-cost prices and prevent a company from pulling out of the state "are antithetical to the principles of proper solvency regulation and could have long-term negative consequences," Vagley said.

He added that when poor regulation allows companies to engage in excessive price-cutting, AIA members have to pay twice. First they lose business to cut-rate competitors, then they have to pay claims when the competitors go broke because most belong to state-guaranty funds that pay the claims and then assesses members.

"We have to bury our own dead," he said.

The AIA is studying several approaches, Vagley said. One possibility is a set of federally mandated national standards that could be applied to state regulators to make sure they are up to the job, or the same standards could be applied directly to insurers. Another idea is some form of self-regulatory organization, such as that in the securities industry, backed by federal authority.

Neither approach need necessarily lead to full federal regulation, Vagley said.