Insurance companies, especially the big players in the mortgage space, are making the case for why they feel the upcoming Basel III capital requirements are not necessary for their business. In fact, representatives are going as far as stating the rules, intended to support financial institution strength, can actually do more harm than good.

American International Group (AIG), of course, became the wobbly insurance giant that posed systemic risk to the financial markets in 2008. The insurer ended up relying on a massive multi-billion dollar government bailout. It's even been subject to speculation that AIG will eventually be classified as a systemically important financial institution under Dodd-Frank reform rules — making it subject to Basel III buffers.

But leaders of insurance firms and associations say AIG is a special case that does not justify sweeping capital requirements for all insurers.

Kevin McCarty, president of the National Association of Insurance Commissioners pointed out in front of a House Committee on Financial Institutions and Consumer Credit and Insurance that insurance companies have a different structure than banks with clients who pay premiums up front for insurance protection.

With Basel III pushing for higher capital requirements at banks and financial firms, McCarty suggests insurers should be exempt or treated in a different manner for the most part.

"We further indicated to the board that insurers typically have different liquidity needs and rely more on unassigned funds than other financial institutions and, therefore, have less of a need to issue various types of capital instruments," McCarty told the committee.

Insurers, like community banks and credit unions, continue to push back against the idea that a one-size fits all approach is the right way to insure institutions have met their liquidity needs.

"Firstly, state regulators are concerned that an over concentration on capital calculations can breed a dangerous overconfidence in the ability to measure requirements perfectly," McCarty said. "Capital requirements are but one of many tools in the U.S. system, and go hand in hand with solvency, monitoring, enforcement, and the world-leading data collection described earlier."

He added that a single capital standard also poses risks if it creates the wrong incentives for firms. On the other hand, McCarty says regulations that fit each type of firm have a better chance of detecting and preventing financial disasters.

Paul Smith, senior vice president and Treasurer of State Farm Insurance Co., added, "The proposals do not appropriately recognize that insurance risk is necessarily different than banking risk and that these differences impact the capital required to prudently manage each type of business."

Smith said, unlike AIG, top-tier insurers are already required to follow state holding company statutes that already enforce strict oversight of transactions. AIG, on the other hand, was not a "functionally regulated insurance company," Smith added.