Ralph Nader and a consumer group yesterday charged property and casualty insurers with price-gouging the public and called for tighter federal regulation of the insurance industry.

Nader and the National Insurance Consumer Organization (NICO) said the insurance industry defrauded the public by claiming it has been forced to raise premiums after dramatic losses last year, when Nader said the industry actually earned $6.6 billion.

The Insurance Information Institute, the trade group for the industry, said last week that it would lose a record $5.5 billion in 1985. But Nader and NICO argue that the insurance industry's reported losses were "misleading and fraudulent" because they do not include $6.5 billion from the increased value of its investments and $3.5 billion in federal tax credits.

"What they did was they sold their stocks and bonds, made a profit, put that profit into their pocket, or invested it, more likely, and they didn't even count it when they reported their $5.5 billion loss," said J. Robert Hunter, president of NICO and former federal insurance administrator in the Carter and Ford administrations.

In addition, NICO said the insurance industry improperly included in its losses dividends of $2.1 billion paid out to policyholders. "They are trying to cover their price-gouging that's going on," said Hunter, who contended that the industry twisted its figures to impose rate hikes of up to several hundred percent.

The Insurance Information Institute responded to Hunter's charges yesterday by arguing that, under the law, insurance firms must count dividends as expenses. The trade group acknowledged that the $5.5 billion loss it reported was its pre-tax operating loss. However, no mention of the industry's after-tax profit was included in its reported figures last week.

"The most important thing to us is the operating loss," said Sean Mooney, senior vice president of the Insurance Information Institute. "We managed to eke out a profit because we sold an awful lot of stock, but that stock was sold to pay our losses."

Local insurance regulators, however, said that insurance companies' investment income, not just their operating income, is an important consideration when reviewing rates to see if they are excessive.

"Insurance companies are required to include investment income in the ratemaking process, and we review the rate filings to make sure that is done," said James Montgomery of the District of Columbia Insurance Administration.

In Maryland, investment income is considered when insurance regulators have to approve rates, such as workers' compensation and legal and medical malpractice insurance, according to Tom Barbera, deputy state insurance commissioner.

Virginia insurance regulators also take into account investment income when reviewing rates for certain types of insurance, such as medical malpractice, according to Pete Synnott, state deputy insurance commissioner. But under its "competitive rating laws," the state cannot disapprove any rate as being excessive unless there is insufficient competition for business in the state, Synnott added.

Insurance companies used the operating loss they reported to justify a 21 percent increase in premiums last year, which is $25 billion -- or $105 more in premiums for every man, woman and child in the nation, Hunter said. An increasing number of insurers are refusing to provide coverage at any price, he added.

The insurance industry said that the escalating cost of litigation, legal costs and multimillion-dollar awards were a major factor behind its recent losses, and it has asked legislators to control the increasing legal judgments against professionals and businesses.

But Nader called the litigation crisis "fictitious" and said that insurance companies merely are choosing to emphasize the occassional very large settlements.

"The insurance industry can't tell us how much they paid out in verdicts," Nader said. "Because if they did, the bottom would fall out of their massive fraud."

The rate increases and increased policy cancellations are an attempt to pressure state legislators into reducing liability and reducing protection for injured people, Nader charged.

The total insurance bill in this country rose from 11.1 percent to more than 12 percent of disposable income last year -- more than $300 billion -- displacing federal income taxes as the third-largest expense in the nation's budget behind food and housing, according to NICO.

The cyclical nature of the insurance industry is one reason insurance premiums rose dramatically in 1976 and again last year, according to Jay Angoff, counsel to NICO.

"Insurers cut their prices when interest rates, and thus their income from investing the premiums they collect, are high," Angoff said. "And they raise rates when interest rates, and thus investment income, are low."

Over the past 10 years, the index of the leading property/casualty insurance stocks rose by almost 500 percent, while the Dow Jones industrial average did not even double, NICO said. During last year, the insurance index rose more than 50 percent, about twice as much as the Dow Jones industrial average, the insurance consumer group said.

"There is no question that this is a highly profitable industry," Hunter said.

NICO proposed that a federal insurance office be established to review the industry and set the standards for state regulators, and that federal law, which currently allows product manufacturers to form pools to insure themselves or to purchase insurance on a group basis, be expanded to include other groups such as nurse midwives and daycare centers.

In addition, Hunter urged that the insurance industry's antitrust exemption be ended, and that a federal reinsurance program be established to allow a second company to share the risk with the firm originally writing the policy.