State insurance regulators are trying to decide how urgent changing the rules governing life insurers’ capital and surplus really is.

That topic surfaced Tuesday in Washington, during a hearing on the capital and surplus proposal submitted to the National Association of Insurance Commissioners, Kansas City, Mo., by the American Council of Life Insurers, Washington, in November 2008.

The NAIC Capital and Surplus Relief Working Group organized the hearing. After listening to the witness presentations, the participating commissioners ended up recommending most of the components of the ACLI proposal to the NAIC’s plenary.

The plenary, the NAIC body that includes all voting members of the NAIC, is set to vote on the proposal Thursday.

Robert Hunter, who represented the Consumer Federation of America, Washington, and the Center for Economic Justice, Austin, Texas, at the working group hearing, said that he believes the hearing was a “sham” and that commissioners had already decided to advance the proposal.

The speed of the process for considering the ACLI proposal, the lack of openness of the consideration process, and the lack of consideration of consumer protections suggests a lack of interest in looking after consumer interests, Huntersaid.

The CFA is so disenchanted with the current state-based insurance regulation system that it is deciding whether to continue to support the system, Hunter said.

If a decision is made to support federal regulation, “there won’t be an ‘O’ in it, Hunter said, alluding to the push for an “optional federal charter,” or a system that would give insurers a choice between sticking with state regulation or coming under the jurisdiction of a new federal regulator.

Steven Goldman, New Jersey commissioner of banking and insurance, said he disagreed with Hunter.

Hunter may not agree with the way commissioners work for consumers, but commissioners do work for consumers, nonetheless, Goldman said.

“Nobody knows where the bottom of this financial crisis is, and it changes day by day for the worse,” Goldman said.

ACLI Chairman Patrick Baird, who is president of Aegon USA, Cedar Rapids, Iowa, a unit of AEGON N.V., The Hague, Netherlands, cited “unprecedented times” as a reason for advancing the ACLI proposal quickly.

Even if life insurers do not need capital now, they might at a future point, Baird said.

In other countries, insurers already have begun to unlock what Baird described as overly conservative reserves, and that shift could put U.S. insurers at a disadvantage, Baird said.

Commissioners repeatedly asked Baird and two other witnesses – Scott Harrison of the Affordable Life Insurance Alliance, Washington, and Bradley Smith, chairman of Milliman Inc., Seattle – whether implementing the ACLI proposal would change the way rating agencies view a life insurance company’s financial strength, and whether there were any companies that are in danger of failing.

The witnesses did not say whether any companies are in immediate danger. They talked about the lack of options for raising capital and the potential for a continued market decline.

Paul Graham, the ACLI’s chief actuary, told commissioners that the reserves for universal life with secondary guarantees are 33% higher than they need to be and that, even under a principles-based reserving system, would be 20% higher than they need to be.

After the presentations were over, New York Insurance Superintendent Eric Dinallo said commissioners came to the hearing thinking that insurers faced a potential “apocalypse.”

“I’m not feeling that right now,” Dinallo said.

Illinois Insurance Director Michael McRaith said he believed there had been little explanation of why the ACLI proposal had to be adopted at this moment.

“Some changes need to be made,” McRaith said.

But the explanations given do not “justify the need to make changes immediately,” McRaith said.

McRaith said he is leaning toward taking a more holistic, long-term approach rather than voting for the ACLI proposal.

Maryland Insurance Commissioner Ralph Tyler said he is still deciding how to vote.

Iowa Insurance Commissioner Susan Voss, NAIC vice president, said, “I never got the sense that if we don’t do this tomorrow, the industry will fall on its knees and it will be the end of the earth.”

Connecticut Insurance Commissioner Thomas Sullivan said one argument for acting immediately is that no one knows when the bottom of this crisis will be and that companies might need more flexibility.