Years of fiscally risky behavior helped topple U.S. business giants and helped create the wounded economy. Now life insurance companies are trying to emulate the very behavior that helped get the country into this mess in the first place, according to consumer advocate groups.

The industry wants to be allowed to have less capital on hand to support its life insurance and annuity obligations, an idea the Center for Economic Justice and the Consumer Federation of America find upsetting. They claim such a move weakens customer protection and is a disturbing throwback to the kind of behavior that helped create the country’s current problems.

But the industry says the position is perfectly defensible. Life insurers are required to keep a certain amount of capital on hand to support their customer obligations, and the National Association of Insurance Commissioners is now reviewing a proposal that would lower those limits, including holding a public hearing on the matter at the end of the month.

“What we are seeking is to have greater flexibility,” said Jack Dolan, American Council of Life Insurers spokesman. The proposal that his group is suggesting would free up an estimated $25-30 billion in capital for the industry, which represents 6-7 percent of the industry’s total capital as of year-end 2007.

“This money is walled off, and we would like to have access to it,” he said, adding that doing so would most importantly free insurers to grow by writing new business. The younger a policy is, the riskier it is, Dolan said, so having more capital freed up lets insurers, in turn, be freer to write more business. Until that happens, insurers are much more stifled in those efforts, which especially hurts these companies during a financial contraction like this one.

ACLI’s president, Jack Keating, had been quoted in other media reports as saying lowered limits would provide more competitive priced products, but in an interview Dolan balked at saying that insurers would be able to offer lower-priced products for consumers.

‘Intolerable Situation’

The industry’s reserve requirements are extremely high, Dolan said, and regulators have long been considering lowering them.

“During good times, it was a tolerable situation Â… now, it’s an intolerable situation.”

A recent report by Connecticut-based researcher Conning & Company noted that insurers’ capital levels have dipped a great deal this year – while most of the industry appears well above the safe mark, the picture was decidedly mixed.

According to the report’s executive study, the ratio of total adjusted capital should be above 200 percent: in 2007, the median value was 408 percent. The study forecasts that 2008 puts that number at 325 percent, and 2009 will go even lower.

Dolan pointed out that those levels are still well above any level that would require regulators to take action, and still reflect healthy companies. The report noted that for a surplus reduction of that size, some companies will be required to raise capital, as Hartford Financial’s $2.5 billion capital infusion from Allianz SE or the $125 billion federal bailout of the American International Group.

Steven Weisbart, chief economist for the Insurance Information Institute, said this capitalization battle is largely about perception. Last year at this time, analysts and insurers were generally thinking that they had too much capital sitting around, doing nothing.

But then Lehman Brothers failed and AIG required a bailout, among other catastrophes, Weisbart said. That turned the tables completely, and suddenly everyone – particularly analysts who dole out financial soundness ratings – were asking, “Do these companies have enough capital?”

“A number of companies’ stocks got beaten down, even though their financial operations hadn’t changed much.”

The industry is basically saying, “We don’t need a bailout, but we’re stronger than the general perception is,” and if regulators would concede they have more capital than we really need, their stock prices would go up, Weisbart added – other than that, the companies will likely remain conservative spenders of their money.

“I don’t think there’s any kind of back channel plan, once the standards get changed, to do anything reckless with this money,” he said.