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WASHINGTON-State insurance regulators want to advise states on how to allow mutual insurers to reorganize in a way that balances the interests of insurers and policyholders.

"Mutual insurers have a right to change their structure, but policyholders must be protected," said Robert G. Lange, chairman of the Mutual Holding Company Working Group of the National Assn. of Insurance Commissioners.

He made his comment at a public hearing during the recent NAIC quarterly meeting in Washington. The hearing underscored the desire of the NAIC, which is drafting a position paper on the issue, to develop practical guidance for state regulators on conversions, which potentially could redistribute billions of dollars in insurer assets.

Mutual insurers want to increase their competitiveness through conversions to stock-type companies, while policyholders want to protect their ownership interests. Those goals can collide.

The topic is increasingly important because of "the beginning of a trend toward demutualization, or the formation of a model holding company structure, which is a partial demutualization," said Derrick Vializ, assistant vp-life/health with rating agency A.M. Best Co. in Oldwick, N.J.

The impact of the issue on large insurance buyers varies, depending on the perspective of the observer.

"Large premium payers who may have millions of dollars at stake will benefit from a public airing of all the issues," said consumer advocate Jason B. Adkins, executive director of the Center for Insurance Research in Cambridge, Mass.

However, Mr. Vializ said he thinks corporate buyers of insurance are not necessarily directly affected by such reorganizations. In fact, "the reorganizations may benefit corporate insurance buyers by providing more cooperative and efficient providers of financial and insurance products and services."

Regulators' interest in the topic stems from concerns about fairness following a flurry of recent state law changes regarding conversions.

Many states are significantly changing laws in a variety of ways to make mutual insurer conversions easier. Their motives sometimes include a desire to attract potential insurers to their states, especially if a pending federal bill makes it easier for mutuals to redomesticate.

In 1997 alone, seven states have adopted laws to simplify the demutualization process by allowing formation of a mutual holding company, according to Erik N. van Nispen, senior vp with Ryan, Beck & Co., an investment banking company in Livingston, N.J.

That brought to 15 the number of states plus the District of Columbia adopting laws allowing that approach.

Such a tax-free reorganization allows the operating subsidiaries of the mutual holding company to convert to stock-owned companies as long as the holding company retains 51% ownership.

In addition, five states plus the District of Columbia have adopted the so-called "subscription" approach, which gives policyholders the right to buy stock in the converted company at a discounted rate.

Some jurisdictions allow both approaches.

In addition, New York Gov. George Pataki is proposing changing state law to allow for the mutual holding company approach. A hearing is scheduled for next week in New York.

So far, relatively few mutuals have converted to stock companies, though several insurers are positioning themselves to possibly do so in the future. At stake is the potential redistribution of billions of dollars in assets held by insurers organized as mutuals as well as the ownership rights of policyholders.

At the end of 1996, mutual insurers owned about 38% of the life/health industry's $2.29 trillion in assets and about 30% of the property/casualty industry's nearly $758 billion in assets, Mr. van Nispen said.

Those estimates may be understated, said Mr. Vializ.

Depending on state law, a mutual insurer's ownership and profits typically are distributed among members in proportion to the amount of business they do with the company. Mutual insurance company members generally are policyholders entitled to name the directors or trustees and to receive dividends or rebates on future premiums.

Mutual insurers, especially those writing life/health coverages, favor conversions for several reasons.

Supporters say conversions increase access to capital, preserve managers' control and create shares for stock options to attract quality executives as well as for acquisitions with little or no cash, according to insurer representatives and their financial and legal advisers.

"I think it is important for (mutual) insurance companies to have a level playing field with other financial institutions," including stock-based insurers as well as banks seeking increasing authority to sell insurance products, said Mr. van Nispen.

But consumer representatives warn that the conversions don't adequately consider policyholder interests.

Policyholders are being too easily separated from their ownership assets by executives of a newly converted insurer, they say. Those executives become embroiled in a conflict of interest between their roles as shareholders and policyholder fiduciaries, said consumer advocate Mr. Adkins.

"These proposed transactions are designed to benefit a small, sophisticated minority of insiders who will make enormous windfalls at the expense of the vast majority of policyholder/owners," he added.

The NAIC's inquiry into the issue "marks the end of the stealth period for conversions, as Ralph Nader has said," Mr. Adkins added.

"The only real scrutiny the proposals could receive is in the state regulatory process, including public hearings, and yet the laws fall short in providing what is needed," he said