The U.S. Federal Reserve is considering a proposal for new nationwide insurance capital standards that would rely heavily on the current system of state-based regulations, according to a copy of the plan seen by Reuters and people familiar with the deliberations.

The plan, which a group of the largest U.S. insurers discussed with the Fed on May 20, would avoid a fundamental overhaul of how state-based insurance firms are regulated, and be based on accounting methods already in use.

At the same time, it would give the Fed a single benchmark to measure the risk in larger firms that consist of several such state-based units, enabling it to compare them to other U.S. or foreign financial firms for the first time.

Unlike Wall Street banks that are subject to Fed oversight, large insurance firms such as MetLife and Prudential are overseen by a multitude of state regulators, and there are no nationwide rules that determine how much risk they can take on.

This came to light when insurance giant AIG collapsed in 2008 because of risky bets made by a little-known London unit, requiring a $182 billion U.S. government bailout.

The proposal, if adopted by the Fed, would represent a middle ground between leaving the state-based rules unchanged, and a completely new capital regime that the industry first feared would be too costly.

“We do expect the Fed to make some pretty significant changes, but at least they will be starting from an accounting and reporting regime which is tailored to insurance,” an insurance executive familiar with the talks said.

The Fed declined to comment.

It is the first time that details of the insurers’ proposal have emerged. The $1 trillion a year industry in February first presented its plan, Reuters reported in March.

After the financial crisis, the Fed was put in charge of overseeing roughly a third of the industry.

It has been slow in building insurance expertise—it hired a former Connecticut state regulator to head the effort only last year—and has not given any indication of what the new nationwide capital standards it is developing will look like.

Insurers fear they could be treated too much like the heavily-regulated Wall Street banks, given the Fed’s history as a bank watchdog.

Each of the 50 states in America has its own insurance regulator, whose primary interest is to protect policyholders’ money rather than the wider financial system.

Bank of America analysts have estimated that large insurers could see their capital levels drop by 50 percent in a worst-case scenario under new Fed rules. But the plan proposed by the insurers would be far less drastic.

Not Negotiating

The document reviewed by Reuters shows how state watchdogs would measure capital for each state-based unit. The numbers would then be added up using a yet to be determined formula, yielding one overall ratio that the Fed would use as its yardstick for measuring risk.

“This is essentially how we manage our business today,” said a second insurance executive familiar with the talks.

The executive, and another industry source who was briefed on the talks, said that the Fed has not given any clue as to whether it will adopt the plan. Both cautioned not to describe the talks with the Fed as ‘negotiations’ and said Fed staff at the May meeting asked some ‘tough’ questions.

“We fully expect the Fed will have its own view on a number of issues,” the first executive said, adding that could well translate into higher capital demands than is now the case.

Among other questions, the Fed wanted to know how the proposal aims to deal with the fact that capital standards can be different between the 50 U.S. states, the people said. It also asked how to compare the units that are regulated abroad.

Fed staff also pointed out that they are concerned many insurers engage in risky financial market activities, such as securities lending and investing in derivatives.

(Reporting by Douwe Miedema; Editing by Soyoung Kim and Alan Crosby)