Illinois last week became the third state since the beginning of June to allow state-chartered banks to sell insurance, as the rollback of decades- old laws separating banking and insurance continued.

Gov. Jim Edgar signed the Illinois bill on Tuesday; his counterparts in Pennsylvania and Connecticut signed similar measures last month. Over the past two years, Texas, Rhode Island, Florida and other states have reversed "nonaffiliation" laws to let their banks into the insurance business.

In all, 32 states now allow state-chartered banks to sell insurance, according to Michael White, the head of a Radnor, Pa.-based consulting firm.

That number is likely to grow. New York Gov. George Pataki could sign a bill as early as this week; New Jersey and Massachusetts could adopt such legislation later this year, and several states, including Maine and Ohio, could follow suit in 1998.

The states are moving to ensure a level playing field for their banks after a Supreme Court decision last year affirmed the right of federally chartered banks to sell insurance from offices in small towns.

Many of the state laws forbidding state-charted banks from selling insurance were enacted in the 1950s at the behest of independent insurance agents, who were wary of bank competition.

Such agents have now largely conceded that state banks can sell insurance, said David Turner, assistant vice president of state governmental affairs with the Independent Insurance Agents of America.

"We now support the idea of (insurers) affiliating with banks, provided there are certain safeguards to protect consumers and level the playing field between agents and banks," said Mr. Turner.

The 300,000-member group lobbies to forbid banks to condition insurance approval on the purchase of other bank products; to make banks disclose risks associated with insurance; and to make them keep insurance information confidential.

Mr. Turner said that safeguard language in the Pennsylvania and Illinois laws could have been tougher, but that his group was largely satisfied.

In moving to make conditions more favorable for state-chartered banks, the states are largely motivated by money, said Kenneth Kehrer, an insurance consultant in Princeton, N.J.

States draw substantial sums from their banks in the form of bank examiners' fees and licensing fees.

To keep their banks happy, some states have enacted "wild card" or "parity" statutes, which give the state banks whatever rights are granted to federally chartered institutions.

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