Paul Smith, State Farm senior vice president and chief financial officer, said in his statement, “We are not seeking weak capital rules or special exemptions—just rules that make sense.”

He noted that “nothing that occurred at AIG, including the difficulties experienced in its securities-lending program, warrants or justifies imposing a regulatory regime that does not match the business model and economic reality of the SLHC being regulated, and that could actually weaken the SLHC.”

Smith also attacked a provision of the proposed rule requiring insurers that operate thrifts to use Generally Accepted Accounting Principles (GAAP) instead of the current statutory accounting principles (SAP), which insurers currently. Smith says the new rule may conflict with the McCarran-Ferguson Act, which assigns insurance regulation to the states.

He clearly implied a legal challenge if the rules aren't revised for insurance-based savings and loan holding companies.

“We further believe that if the Federal Reserve Board ignores existing state regulation and pushes ahead with entirely new standards for insurers, a strong case can be made that the proposals run afoul of the McCarran-Ferguson Act, which places authority on insurance matters with the states,” Smith said.

He suggested the only recourse for the Fed is to issue a new proposal for insurance-based SLHCs so that concerns can be addressed.

Kevin McCarthy, Florida insurance commissioner and president of the National Association of Insurance Commissioners, said in his testimony, “Capital requirements alone cannot enhance the safety and soundness of complex financial institutions – they are just one tool in a bigger toolbox.”

He added, “For instance, the Basel III capital requirement would not have prevented the AIG meltdown.”

He also said that federal regulators should not impose “one-size-fits-all” financial standards on U.S. financial firms, that is, apply “bank-centric” capital rules on insurers.

In testimony at the hearing, Michael Gibson, director of bank supervision and regulation for the Fed, defended the proposal, saying it was mandated by an amendment to the DFA sponsored by Sen. Susan Collins, R-Maine.

Collins, though, in a recent letter to the Fed, said it was not Congress' intent that federal regulators “supplant state-based regulation with a bank-centric capital regime.”

State Farm's Smith said in his testimony that although the Collins amendment requires the board to set minimum capital requirements for depository institution holding companies, “it does not preclude the Fed from taking into account the existing and comprehensive risk-based capital structure of insurance-based SLHCs in establishing these minimum capital requirements.”

In a statement issued in connection with Collins' letter and the latest hearing, Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies, says Collins made it clear in “that Congress did not intend for Dodd-Frank to apply 'one-size-fits-all' regulation to very different parts of the financial services industry.”

Grande says, “NAMIC shares her view that SHLCs primarily engaged in the business of insurance should not be lumped in with those focused on banking, as we made plain in our letter to regulators. We hope that Sen. Collins' letter has made this message clear, and that the regulators will recognize this distinction between banking and insurance in their final rule.”