The report suggests five alternate regulatory options under discussion:

o A systemic risk regulator, which would involve a new national regulator who would monitor and manage risk to the entire financial system and could overrule existing regulators on issues relating to solvency. The states would continue to regulate p-c insurers.

o Split stability regulation, where the national government would take on some responsibilities such as setting capital and reserve requirements and conducting solvency examinations of insurers. The states would retain regulation over price and products and ensuring fair treatment of customers.

o A comprehensive stability regulator, where the national government would regulate insurers, and the states would only ensure fair treatment of customers.

o A national regulator for large and complex insurers, where the national government would oversee the largest and most complex p-c insurers, while the states regulate smaller insurers.

o An integrated financial activities regulation, where a new national regulator or regulators would regulate all financial services firms, including p-c insurers.

Splitting regulatory responsibilities, as options one and two propose, would do more harm, the report states, leading to confusion, lack of accountability and tension.

The report concludes options three, four and five "would increase the quality of solvency regulation by improving the talent and resources the regulator would bring to bear, while also ensuring that regulators had a comprehensive view of all the activities of insurers."

The report notes that its analysis and research "suggests the U.S. would benefit from a change in its regulatory structure for p-c insurance, with the national government playing a more active role."

While proponents of state-based regulation point out that U.S. p-c insurers have fared better than banks during the recent financial crisis, critics of the state-based model say other factors–such as rating agency capital requirements and the relative safety of insurance versus banking–are responsible for the condition of p-c insurers rather than the regulatory structure, the report said.

Blain Rethmeier, spokesman for the American Insurance Association (AIA), which has supported the idea of an optional federal charter, applauded the report's conclusions. "The McKinsey report is encouraging," Mr. Rethmeier said. "It's a well-respected firm that employs a number of smart people."

Mr. Rethmeier noted that Treasury Secretary Tim Geithner also "said there's a good case for introducing an optional federal charter for insurance" in comments he made yesterday to the House Financial Services Committee.