The property/casualty industry has historically been regulated at the state level, but insurers have a lot on the line in the Presidential election next week.

Under an Obama administration the industry has seen the passage of Dodd-Frank and the specter of dual regulatory oversight for the industry. Dodd-Frank’s first move toward the possibility of federal regulation of the insurance industry was the creation of the Federal Insurance Office (FIO).

The FIO was specifically tasked with creating a report on the efficiency or weaknesses of the state regulatory system and how to improve it, explains Howard Mills, chief advisor with Deloitte LLP's insurance industry group and former Superintendent of the New York State Insurance Department. He says that report, which was due in January of this year, has likely been completed and would be released after an Obama win.

“It’s mandated that the FIO issue this report, so the report is going to have to come whether it’s from the Obama or a future Romney administration. The concern is what this report might say and if the Feds might get more involved in regulating insurance. [P&C insurers] are hoping the report is a nonevent,” Mills says.

Of concern is that insurers could be labeled as SIFIs, or systemically important financial institutions, which would invite federal oversight, which is a greater possibility for life insurers. However, at the state level, Mills says, there are mechanisms to wind down any P&C companies that were to become insolvent, and that with few exceptions the P&C industry is very supportive of state regulation and they don’t want to see any strengthening of the Fed’s oversight.

“A Romney administration would innately have more respect for the state regulatory mechanism that the industry has operated under for the past 137 years or so,” says Tom Litjen, VP of Federal Government Relations for Property Casualty Insurers Association of America. “I think they would be far less inclined to assert a federal regulatory role on the business of insurance.”

Litjen stresses that state regulators are more attuned to the needs of their citizens. “We will aggressively work to protect state regulation and protect McCarran-Ferguson delegation of anti-trust authority to the states,” he says. “We deal with state regulators and regulatory mechanisms, we deal with people who know and understand insurance and there’s a long, long history of state regulation of insurance, and McCarran–Ferguson,” and while there have been efforts to clarify and refine Dodd-Frank he says until a single party controls the House, Senate and the Presidency, there is essentially a stalemate.

“If the president were reelected, it would be more of the same, which is generally seen as a pretty tough regulatory environment,” Mills says. “If there’s a Romney win, all bets are off… and we’d have to see what the new president does with appointing a new leader of the FIO. That could delay that report for a long time,” Mills says.

RELATED SLIDESHOW: Breaking down the battlegrounds for tonight's election returns, many believe these eight states will decide whether Barack Obama will win a second term in the White House or Mitt Romney becomes the nation's 45th president.

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