Two prominent consumer groups are up in arms over proposals that would reduce the amount of money life insurers must set aside to pay future claims.

The Consumer Federation of America and the Center for Economic Justice say the changes would increase the risk that an insurer would fail to pay all its obligations under life insurance policies and annuity contracts.

The revisions would ease capital requirements that the life insurance industry calls inflexible and overly conservative.

Both sides cite the country's current financial crisis in making their arguments.

The industry's effort to modify the rules has the support of regulators, who contend that it won't harm policyholders. "It would be irresponsible for us to suggest something that makes the product riskier," said Roger Sevigny, president of the National Association of Insurance Commissioners, which represents state insurance regulators.

Because all states require insurers to adhere to accounting rules set forth by the association, the organization can change the capital requirements without legislation or any action by individual state regulators.

The group is moving practically at the speed of light on the proposals, which emerged less than two months ago and could be enacted in the next few weeks, said Birny Birnbaum, executive director of the Center for Economic Justice and a former Texas Insurance Department chief economist.

The nine proposed changes would reduce the total reserves that life insurance companies need to hold by about $25 billion -- or about 7 percent of the industry's capital, or net worth, according to the American Council of Life Insurance, which asked for the changes.

Because insurers invest the money they set aside, last year's sharp price declines for stocks and many types of bonds have lowered the industry's capital levels.

The insurance council, in a statement about its proposal, says, "the current inflexible formulas coupled with the nation's financial turmoil may create undue stress on insurance companies' ability to carry on normal business operations."

But lowering reserve requirements could make some troubled insurers appear more solid than they are, said J. Robert Hunter, director of insurance for the Consumer Federation of America.

"What I am afraid of," he said, "is that there are a handful of companies that would be insolvent without these changes, and policyholders won't know."

Joseph Belth, professor emeritus of insurance at Indiana University and editor of the Insurance Forum, a trade publication, said he opposed the rule changes because he and two actuaries he consulted couldn't say how the revisions would affect individual companies or the industry as a whole. Continued...