Debate on the legislation–S. 3217, the "Restoring Financial Stability Act of 2010″–began last week on the Senate floor.

"What notably is lacking" in provisions of the bill that deal with tightened financial regulation "is any provision to enhance regulatory oversight of large insurance companies," along with a call for a Treasury study of state guaranty funds, the report noted.

"The failure of AIG was due, in large part, to the massive securities lending operation that several state-regulated AIG insurance companies ran collectively," according to the report.

The report was released just two days after the Government Accountability Office issued one of its own indicating that because of federal help, AIG is now "stable."

However, the GAO report said the ability of the government to recover all the $182 billion it has loaned to AIG since 2008 depends on the ability of its underlying insurers to increase profitability.

"While insurance regulation is a complex matter, and our state system largely has functioned well for nearly 200 years, the size and international reach of many insurance companies has raised legitimate questions, including whether reforms are needed to reflect changes in the marketplace," the report said. "The failure of the reported bill to include provisions to ensure the proper oversight of large, interconnected, and international insurance companies like AIG is a glaring omission."

Such comments are likely to stir up strong opposition from supporters of state regulation.

In a recent letter to the Senate, for example, the National Council of Insurance Legislators criticized a provision in the bill creating an Office of National Insurance. NCOIL said state regulators fear such an office "would preempt state law and eventually threaten successful state insurance oversight."

NCOIL's letter added that "as has been evidenced and attested to over and over again, and despite the wishes of those who would seek to avoid the protections of state regulation, insurance regulation did not contribute to the crisis and does not need federal intervention."

Meanwhile, insurers should not be assessed to fund the unwinding of failing companies that threaten the nation's financial system, three property and casualty insurance groups told the Senate leadership.

The American Insurance Association, the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America, in seeking an exemption, cited insurers' existing participation in the state funds that guaranty support for failed insurers. Their plea was made in a letter to Sen. Harry Reid, D-Nev., Senate majority leader, and Sen. Mitch McConnell, R-Ky., minority leader.

"We ask that you recognize the existing state insurance guaranty system and not subject the property and casualty industry to inequitable, dual resolution authority," the letter said. "Making property and casualty insurers pay twice for resolution threatens to increase costs for the 270 million home, auto and business policies that we honor across the nation."

Instead, the letter said, "these assessments should only apply to non-bank financial companies that are deemed systemically significant…"

The letter argued that "it simply does not make sense for non-risky property and casualty insurers to be subject to two regimes–a state fund to address their own industry's insolvencies, and a federal fund to address the insolvencies of unrelated financial services companies. It is inequitable to hold insurers responsible for the risky behavior of others."