Consumer advocates and professional groups urged Congress yesterday to assume some of the risk undertaken by insurance companies in high-risk lines of liability coverage that have virtually disappeared in the past year.

The proposal was advanced as a way of enticing the companies into insuring day-care centers, municipalities and other entities that have seen their premiums rise and policies canceled in droves. Insurance officials ridiculed the plan, however, and said the solution to the insurance squeeze is legislative reform of the U.S. court system. As it is now, the system awards excessively large financial settlements to victims of professional and corporate negligence, they said.

The reinsurance plan was floated at a hearing called to investigate the reasons for the current shortage of liability insurance. During the day, consumer advocates, groups that can't get insurance and insurance industry spokesmen clashed over the true financial condition of the industry and the measures needed to correct it.

Consumer activist Ralph Nader and Robert Hunter, president of the National Insurance Consumer Organization, portrayed the industry as the victim of a problem of their own making. They said insurance companies had cut rates too precipitously in the late 1970s when they were able to do so because of high interest rates. Now that interest rates have subsided, they said, companies are jacking up rates and canceling policies to pay for the losses that are now occuring.

Hunter conceded that some premium increases are necessary, but said that they were nowhere near the 50 to 200 percent increases that are being reported in certain lines of insurance. He and Nader also suggested the reinsurance plan for certain lines of insurance that companies are refusing to write, as opposed to tort reform, which they said would limit victims rights.

Under the plan proposed by Hunter, the government would have the authority to offer reinsurance to insurers -- that is, to indemnify them partially -- for the groups that can't find insurance. He said many of these groups have very low claim records but are victims of a general tightening of the market for insurance.

He and Nader noted that such a program worked in the late 1960s to keep insurance companies in the inner cities. "The government made money in this business, contrary to insurance industry predictions," said Nader. Under questioning, however, Hunter acknowledged that other government insurance programs, such as for flood insurance and crop insurance, have lost money.

John Crosby, vice president of the National Association of Independent Insurers, said federal insurance is not necessary to solve the problem. Instead, the government should let market forces bring the companies back to certain lines of business, he said, predicting that this would happen as the insurance companies brought more realistic pricing to the various lines

Rep. James Florio (D-N.J.), chairman of the House Energy and Commerce subcommittee that called the hearing, said after the hearing the solution to the problem lies more in addressing the cyclical nature of the casualty insurance industry, although he said federal reinsurance could be one solution. He said that state insurance commissions, which have the responsibility for regulating the industry, are not doing the job.