A decade ago, officials of the Equitable Life Assurance Society of the United States thought they had found a can't-miss consumer product.

It was called a "guaranteed investment contract," and it obligated the company to pay investors a specified yield over a certain period, much like a certificate of deposit. Other companies offered these contracts, but Equitable decided to go them one better. It would allow investors to lock in double-digit returns for as long as 10 years.

The plan worked like a charm. Investors flocked to Equitable's GICs. But as overall interest rates turned down, Equitable discovered to its horror that it was paying out more to its investors than it was earning on their money. Millions of dollars were flowing out the door and would continue to flow out until the contracts expired.

After taking a painful financial beating -- losses amounted to as much as $200 million to $250 million each year from 1982 to 1989 -- Equitable hopes it has weathered the storm.

But its comeuppance and other calamities in the insurance industry have set alarm bells ringing on Capitol Hill and elsewhere. Policy makers and policyholders alike are being forced to ask: Is the insurance industry another savings and loan crisis waiting to happen?

There are reasons to worry, a congressional subcommittee has concluded. Insurers, like S&Ls, have been hard pressed by competing financial services firms seeking to siphon off consumer dollars. They have had to face rapidly changing economic conditions that have made many insurance risks harder to predict. Striving for profits, many insurance companies have moved into new and different lines of business and new and riskier forms of investment -- just as thrifts did 10 years ago.

In addition, cases of reckless, incompetent management and even downright fraud have been discovered in the aftermath of several big insurance failures.

For its part, Equitable's move into GICs appeared to make sense at the time. With its traditional life insurance business slowing down and inflation-conscious customers hungry for investments that promised steady high returns, Equitable's top brass had been looking for something that would put the nation's third-largest life insurer back on track. But it overreached.

Today, Equitable is a much-chastened company. Its top management has been replaced, executive perks like a fleet of 12 limousines have been swept away and it is "refocusing" on its core insurance business as the old GICs "roll off the books." The company's chairman, Richard H. Jenrette, has vowed to lop $100 million in costs in 100 days, beginning in May.

Equitable's story shows how even a big, experienced, apparently sound insurer can quickly find itself in trouble as it seeks growth and profit in today's rapidly changing financial world.

A study completed earlier this year by IDS Life Insurance Co. concluded that in a severe economic downturn or a sharp decline in investment, "there is a significant risk that one-fifth ... of today's major life insurers will become insolvent."

"The parallels between the present situation in the insurance industry and the early stages of the savings and loan debacle are both obvious and deeply disturbing," Chairman John D. Dingell (D-Mich.) of the House Energy and Commerce Committee observed earlier this year following a series of hearings by his oversight subcommittee.

Should the insurance industry go the way of the thrifts, the consequences would be at least as severe, and perhaps for the average citizen more so.

Americans depend on insurance companies today not only for traditional coverages like business liability, home, auto and life insurance, but also for annuities, mutual funds and other investment operations.

The potential exposure from mass insolvencies stretches the imagination. Even small collapses have ruinous potential, as in the case this year of a California businessman whose health insurer failed. While he was shopping for a new policy, he suffered a serious heart attack. His medical expenses ruined his business and forced him into bankruptcy.

A growing number of people depend on insurers for their pensions. It has become common practice for corporations seeking to cut costs and obtain extra cash to terminate their traditional pension plans. The pension benefits, which are government-insured, are replaced by annuities purchased from private insurers, for which there is no federal insurance.

In fact, no federal promise stands behind insurance. Instead, there are state guaranty funds, supported by assessments levied against insurers. But while the industry is fond of saying "we bury our own dead," not all states have these funds, and critics fear that many of those that do would be quickly overwhelmed if insolvency became widespread.

How Insurance Works

The likelihood of such a catastrophe is hotly debated. To understand the arguments, however, one must first understand something of how insurance works.

As Dingell's panel noted, insurance is very simple in concept and in certain ways works much the same as a bank or savings and loan. The insurance company takes in money -- premiums -- and agrees to give it back plus an additional amount, if and when some specified event occurs. The company, like a bank or S&L, bets that it can invest those premiums and not only make good on its promises to policyholders but also turn a profit in the bargain.

A few companies, such as Geico Inc. here, make money on their underwriting. That is, they take in more in premiums than they pay out in claims and expenses. Most insurers, though, depend entirely on their investments for any profit.

As the panel noted, "The simplicity of the insurance concept is matched by extreme complexity in its implementation."

Insurance is not a single industry but three -- life, health and property-casualty -- each with different risks and rewards. Some companies specialize in one of these areas, or even a subdivision of one area, while others are "multi-line" insurers offering policies in two or even all three areas. The solvency questions today are focused primarily on the property-casualty and life companies.

Some 3,800 companies sell a form of property-casualty insurance, while about 2,000 are involved in life insurance. While many of these are the same companies operating in different lines, the problems and economics of the two industries are different.

Life insurance is a long-term business. Companies collect premiums over many years, investing them in assets that they hope will perform well enough to pay the promised death benefits to policyholders and provide the company a profit as well. Actuaries have become very good at predicting how long people will live, at least in the aggregate, and companies today are able to predict their costs quite accurately.

But traditional life insurance hasn't had the market appeal recently that it once did. So life companies have turned to products tied to investment performance, such as variable life insurance, annuities and, of course, GICs.

Thus, life insurance has "become more of a spread-type of business," said William P. O'Neill of Standard & Poor's Corp. insurance rating services. This means that profits must come from the "spread" between promised payouts and investment yields. "In order to remain competitive in annuities, insurance companies are under more pressure to offer attractive yields. In order to do that, they have to take greater risks" with their investments, he said.

The IDS report noted that "industry profitability is down ... in spite of a generally favorable economic climate and substantial growth in the insurance industry's base for profits."

Enter Junk Bonds

The mainstay of life insurance asset portfolios has always been the high-grade bond -- government and top-rated corporations. But since yield and safety move in opposite directions, these very safe investments tend to pay lower returns.

So insurers have looked elsewhere, into real estate, into mortgages and into junk bonds.

Today, life insurers hold some 30 percent of the roughly $200 billion in junk bonds outstanding. While this is a small part of the industry's overall $1.1 trillion in assets, there are heavy concentrations in a few companies.

Executive Life Insurance Co., a subsidiary of First Executive Corp. of Los Angeles, has some 49 percent of its assets in junk bonds. These high-risk, high-yield investments have allowed the company to price its annuities very aggressively, winning several contracts to replace terminated corporate pensions. In some cases, terrified workers have exerted enough political pressure on their employers to force them to find another insurer; others remain tied to Executive Life for much of their retirement income.

Many insurers are convinced that the fears are much overstated. Life insurers "have been, if anything, too conservative" in their investments, said Equitable's Jenrette. In his view, insolvencies are unlikely to be numerous, and even Executive Life will pull through despite the recent slump in the junk bond market.

The American Council of Life Insurance, a trade group, has a similar outlook and specifically challenges IDS's insolvency figures.

Property-casualty insurers also are being pressed by competition. But their problems tend to be concentrated in their underwriting activities rather than their investments.

Commercial property-casualty insurers today are operating with claims and overhead that total well over 100 percent of the premiums they collect, raising questions about the ability of some companies to meet claims in the event of a disaster.

The General Accounting Office noted that the number of companies forced into liquidation averaged six a year during the 1970s but climbed to twice that in the 1980-'87 period. In addition, the number of companies designated for special regulatory attention was five times as large in 1988 as in 1979.

Part of the problem is that losses have climbed sharply in liability cases as courts have increasingly looked to insurers as "deep pocket" payers. The industry argues that policies written 40 or 50 years ago were not meant to cover unknown risks like asbestos and hidden pollution, and rulings that they do expose the firms to risks that were not included in the original price of the policy.

One unifying theme among critics and much of the industry is that regulation, which is handled exclusively by the states, is not effective enough.

Many state insurance departments examine companies "domiciled" in their states less than every three years, and many have limited resources. If you own or are thinking of buying an annuity or insurance policy, especially one that you expect to have a claim against far into the future, financial planners suggest checking the insurance company's standing with one of several rating services that evaluate claims-paying ability.

The best known of these is A.M. Best Co., which rates the largest number of companies, but Standard & Poor's Corp., Moody's Investors Services Inc. and Duff & Phelps Inc. also have extensive ratings.

The ratings are a sometimes confusing collection of codes, but financial planners and other insurance experts advise sticking to the top few categories, companies rated A+ or A by Best, for example. Lists of ratings and explanations are often available at insurance agents' offices and in many cases at public libraries.