The issue is critical to reinsurers. They support Senate language giving Treasury strong authority to impose uniform compliance and capital standards on them.

The current plan is for the conferees to agree on a version of the bill, H.R. 4173, by Monday, June 28, with the goal of having final legislation on President Obama's desk by Independence Day.

The National Association of Insurance Commissioners issued a statement last Wednesday saying it strongly supported the House version, which would call for judicial review of a Treasury preemption decision.

In the statement, NAIC President Jane Cline, who is also West Virginia's insurance commissioner, said the Senate's language "directly affects the scope of a new, untested office's power to preempt the state insurance regulatory framework."

"The Senate proposal is not a mere technical change," Ms. Cline said.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee and chief House negotiator, said Tuesday that he "rejected emphatically" the final Senate proposal on this issue.

The Senate had already agreed to accept several other provisions of the House version of Title V of the legislation, which creates the federal insurance office.

These concessions included adding the U.S. Trade Representative as well as the House Ways and Means Committee and the Senate Finance Committee to the groups which would "negotiate, finalize and enforce"' international insurance agreements.

But in a statement, Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee and chief Senate negotiator, rejected the judicial review and covered agreement House provisions supported–and proposed–by the NAIC.

"[W]e are not accepting the House definition of 'covered agreement,' which is essentially limited to mutual recognition agreements," Sen. Dodd said.

"This is a highly technical issue, but our understanding is that a recognition agreement will not allow the federal insurance office to deal with issues such as those arising from the state requirement that non-U.S. reinsurance companies post 100 percent collateral."

Sen. Dodd said the European Union is in the process of revamping its insurance regulations under what is known as the Solvency II directive.

"To continue to operate in the European Union, U.S. insurance companies will need the European Union to recognize the U.S. insurance regulatory system under Solvency II," Sen. Dodd added.

"However, my understanding is that addressing the reinsurance collateral issue in the United States is linked to the EU's recognition of the U.S. insurance regulatory system," he said.

"The House definition of 'covered agreements' therefore casts into doubt whether we could reach an agreement with the European Union," he said.

A group of insurance and reinsurance trade groups sent a letter to the conferees urging passage of the Senate version of the preemption provisions.

The letter said the bill allows what will be known as the Federal Insurance Office to "exercise narrow preemption" of state insurance measures in order to effectuate international regulatory agreements on prudential insurance matters "under clearly defined circumstances and with appropriate due process."

The letter argued that the House version of the bill calls for a process that "could inadvertently hinder" the Federal Insurance Office Director's limited powers.

The letter also contends that a "substantially equivalent" standard for evaluating international agreements is "substantively different than similar international approaches to supervisory recognition."

(In defining "covered agreement," the House language provides for recognition of insurance and reinsurance measures that achieve a level of protection for U.S. consumers that is "substantially equivalent" to the level of protection achieved under state insurance and reinsurance regulation.)

The Independent Insurance Agents and Brokers of America acknowledged that the Senate had agreed to accept major concessions to the Senate bill supported by the IIABA. But the association said it also supported the NAIC's efforts to include the covered agreement and demand for judicial review to the provision.

The National Association of Mutual Insurance Companies said it supports the NAIC and IIABA demand for a judicial review.

"By establishing a review system, the bill ensures that [federal] preemption will occur only when absolutely necessary," said Jimi Grande, NAMIC senior vice president of federal and political affairs. "This would serve as a vital check against an overreach by the federal office," he said.