Times are tough–at least that’s the take-away from life insurers who are making the case that they need capital relief now.

A proposal very quietly floated in November and discussed out of earshot of attendees, consumer reps and media during the winter meeting of the National Association of Insurance Commissioners may well be given the blessing of state insurance commissioners by year-end.

The 9-point proposal advanced by the American Council of Life Insurers includes requests such as: eliminate “artificial constraints” of Regulation Triple-X; facilitate commissioners’ use of discretionary authority to exercise judgment to determine allowable U.S. collateral for reinsurance; waive the standard scenario for C-3 Phase II of risk-based capital; change a mortgage factor in the RBC calculation; and change statutory accounting requirements to follow GAAP rules regarding recognition of the deferred tax asset. These are all very technical ways of saying regulators will be loosening the drawstrings.

Paul Graham, an ACLI life actuary, explains that much of the due diligence has already been done by regulators who are gearing up for the advent of the principles-based reserving project which many say will streamline the reserving of life insurance products. The effective date of these proposals is just being pushed up, he says.

The benefit, he continues, is that risk-based capital will get a boost for many insurers allowing them to keep their current ratings and keep rating agencies at bay.

In fact, Bruce Ferguson, ACLI’s senior vice president-state relations, notes that RBC on average has dropped from 370 to around 300 and the helping hand from commissioners would bring that level up to around 330.

Data provided by Fred Townsend, president of Townsend Independent Actuarial Research Alliance, Wolcott, Conn., confirms that the numbers are not good. The top 100 insurers started the year with $306 billion in surplus but suffered $76 billion in net capital losses during the first 3 quarters, according to Townsend. The losses were offset by $40 billion paid in but were more than 5.5 times larger than net operational gains, he adds. (See story on page 40.)

However, it is really difficult to tell whether regulators concur with these assessments since the reasoning and the discussion among those regulators who are the technical experts was a private conversation on an important public policy issue.

When I asked one regulator why a technical meeting was being closed, the response was that companies were being used as examples, and although unnamed, could be traced by following the discussion. The companies themselves are not in trouble. They were asked to explain what the new proposal would mean to them.

Delivering a major proposal with a request for a 6-week turnaround and discussing it largely in secret with just bits of information getting out creates the impression that one or more companies are in really bad shape.

Even if that impression is not true as the ACLI and the new NAIC leadership are asserting in interviews, it is not unreasonable for such a perception to develop against a backdrop of fallen corporations including Bear Stearns, Lehman Brothers, and the government takeover of American International Group.

So then, is the ACLI proposal a good idea? That depends on which camp you are in.

For companies, it may well be if they get to keep their ratings and the industry as a whole is spared another blow. But, if a company ultimately fails because of looser requirements, the companies will be on the hook for the tab. They will be required to chip in for guaranty fund assessments.

For regulators, it is a coin toss. If they relax capital and surplus requirements and insurers weather this financial crisis, it will be a win. But, if they relax requirements and there is a failure attributable to the change, then it won’t help their case for state regulation.

For the ACLI, it is a win. It can tell its members it helped them with their RBC and rating agency problem. And, if a company fails because commissioners gave the green light to reduce capital, it will be a nice argument for federal regulation even if the ACLI is dismayed by that failure and its impact on the industry.

For investors in insurance stocks, at least initially, it looks like a win.

And what about the consumer whose name is often invoked at the NAIC? Here again, it’s a coin toss. The changes could take capital pressure off of carriers and reduce liquidity concerns. But whether it is actually a benefit will depend on how management deploys that newly freed up capital. Will insurance be cheaper? Will additional products be available? It remains to be seen.