James M. Stone, a youthful Harvard Ph.D who heads this state's insurance department, can be accurately described as a second generation critic of the huge insurance industry.

He is successor to the mantel of former Pennsylvania Insurance Commissioner Herbert Denenberg, who from 1971 to 1974 ran a highly publicized consumerism campaign that played heavily on people's natural suspicions of bug insurance companies and their products. Indeed, Stone says it was reading about Denenberg's battles over insurance rates and coverage that inspired him to go after the commissioner's job here.

"Denenberg's principal contribution," Stone said, "was alerting the entire U.S. public that insurance companies could be forced to do things in the public interest. He left if for others to turn the ideas into permanent change."

Clearly, Stone sees this institutionalization of changing the ways insurance companies do business as part of his role. He is, moreover, far better equipped than Denenberg was to force the insurance industry to move an inch or two.

While Denenberg relied on publicity and his own politician's personality, Stone takes the cerebral approach - applying bell curves and economic truths to prove that insurance companies must change their ways. In addition to his solid educational credentials, Stone also possesses youthful optimism, a very large ego and a vitality that compels him to pace relentlessly behind his desk as he discusses complex issues on the telephone.

Stone enters the insurance regulatory scene at a time when the industry is fighting to retain its traditional approach to business.

Slowly, critics are coming to realize that the creaky - and sometimes corrupt - state regulatory system is badly in need of change. With few exceptions, the major insurance companies have fought against changes in the 1945 McCarran-Ferguson Act. The law exempts the companies from federal antitrust laws and places insurance regulation on the state level.

In January, a Justice Department task force group concluded that special treatment of insurance companies under McCarren-Ferguson was unwarranted. On June 16, Sen. Edward Brooke (R-Mass.) introduced a bill that would, among other things, set up a federally-administered insolvency fund for insurance companies and create a three-person Federal Insurance Commission to replace the limited Federal Insurance Administration, currently under the jurisdiction of the Department of Housing and Urban Development.

Stone is certainly the most outspoken of the 50 state commissioners in favoring more federal regulation. For example, he thinks that the Securities and Exchange Commission should be free to look at all insurance companies, not just holding companies that control insurance firms, as is presently the case.

He agrees with the Brooke bill's contention that the solvency of insurance companies should be overseen by a federal commission.

At present, 46 states have such funds to guarantee that policyholders' claims will be paid in case a property or casualty insurance company collapses, but companies contribute to the fund only after a failure takes place. Only 18 states have a guaranty fund to protect life insurance policyholders in case of an insolvency.

Under the Brooke bill, a permanent fund would be built up by assessing insurance companies, in a manner similar to the assessments for federal insurance for banks and savings and loans.

While Stone thinks that licensing of agents and rate regulation might remain with the states, he goes beyond the Brooke bill in calling for repeal of McCarran-Ferguson and its antitrust umbrella over insurance companies.

Stone, who is only 30 years old, is a bachelor and lives on the Boston Commons. Born in New York City, he attended Harvard College on a national Merit Scholarship and graduated in 1969 with highest honors in economics. He earned a masters degree a year later, and a doctorate in economics in 1973, both from Harvard. The university appointed him a lecturer in economics that year.

He became a vice president of a Boston insurance brokerage while studying to become a chartered property and casualty underwriter and to gain admission to the Casualty Actuarial Society.

"One of the casualty actuarial exams dealt with regulation," he recalled, "and it was in preparing for his that I became intrigued with becoming a regulator."

Stone decided how he would revamp the regulation of companies in Massachusetts, which ranks with New York, California, Illinois, Pennslyvania and Connecticut as a major insurance-writing state. He took his plan to gubernatorial candidate Michael S. Dukakis, for whom he had done some campaign work. In February, 1975, after his candidate won, Stone, then barely 28 years old, became the youngest state insurance commissioner ever.

One common complaint among insurance commissioners is that their departments are underfinanced and understaffed.

But Stone immediately set out to reduce the Massachusetts department staff, which he found "ill-equipped." He cut the size from 304 to 240, but he replaced quantity with expensive quality personnel - lawyers, accountants and actuaries.

"I've had a couple of victories," Stone said of his brief career. Staffing the department with professionals was one, he said, and another was winning a court battle with companies over rates.

But he also had one bitter defeat, which he describes as "major," involving auto insurance rates. Stone said he introduced a system where competition would detewrmine how rates on auto insurance would be set.

"Competition is a good regulator," he said he reasoned. "Unfortunately, the companies used the opportunity to further the extremes of the classification system."

The classification system, which causes rates to be based on such variables as sex, age, race and geography, "may be actuarially sound, but it is totally unacceptable," Stone said. (This is a weakness of the Brooke bill, Stone said, because it allows such rating by classifications if actuarial figures show they are necessary.)

Stone is not among those who believe that insurance commissioners should do their utmost to save companies from insolvency. His main concern is protecting the policyholders. He points to Washington-based Geico, which was saved from insolvency last year as a company that probably should have been allowed to die.

"I think the policyholders deserved protection, which they would have had by splitting the business among a number of companies," he said. "On the other hand, the shareholders and debtholders of Geico deserved no protection whatsoever. A great deal of effort was spent ultimately to enrich the management and financial backers of the company. What is the public interest in making (Geico chairman) John Byrne a millionaire?"