Almost without realizing it, the federal government has over the past decade transferred more and more regulatory responsibility to a handy--if not exactly enthusiastic--surrogate: the insurance industry.

If the trend continues, your local insurance investigator might someday supplant the federal regulatory agencies that now guard against such hazards as pollution.

The transfer of power works like this: Congress wants to protect the public from, say, tsetse flies. So it requires owners of tsetse fly hatcheries to have $1 million in liability insurance to operate. Once the breeder gets insurance, the insurance firm, wanting to avoid damage claims, works to see that tsetse flies don't prey on people.

In theory, everyone benefits. Insurance companies get business, potential victims of a hazard are guaranteed compensation, the regulated industry is insulated from major liability suits and federal regulators free up staff and money by turning regulation over to their private-sector deputies.

But in practice, the laws setting "financial responsibility requirements" are often disliked and distrusted both by the regulated firms--which pay high premiums--and by insurers who worry about underwriting poorly understood and prohibitively expensive risks. Despite this, Congress has gone on setting up insurers as reluctant regulators.

Observers on Capitol Hill, in agencies like the Environmental Protection Agency and in the insurance industry, expect the trend to continue, though EPA plans to drop financial responsibility rules for some 22,000 hazardous waste disposal facilities that are now operating. (The rules for facilities that close won't change.)

"As we deregulate, there's increasing pressure on us to come up with surrogate regulators like the insurance industry," said Jim J. Tozzi, an Office of Management and Budget deputy administrator who works with Vice President Bush's Task Force on Regulatory Relief. "That's not our policy . . . . Surrogate regulation is still regulation for the economy. As such, we'd take a hard look at it" before advocating the idea.

Congress itself did not dwell on the idea when it created what were probably the first surrogate regulators in 1970 with amendments to the Water Quality Improvement Act. The amendments, requiring tankers over 300 gross tons in U.S. waters to have insurance against oil spill damage, were primarily designed to guarantee that spills would be cleaned up and compensation made.

"If you're suggesting that there was a conscious thought that we would use insurance companies to police ship operators --no," said Philip Cummings, minority counsel to the Senate environmental pollution subcommittee. "That was only an additional benefit . . . . The principal reason for financial responsibility is to ensure that the damaged party will be compensated."

"We said let the private insurance industry . . . take the place of government regulation . . . . If [a vessel] is in such sad shape it can't buy insurance, we don't want them in our waters," explained Bob Skall of the Federal Maritime Commission.

This first step toward deputizing insurance firms met little opposition, in part because marine insurers, an interlocking network of self-protection groups largely made up of shipowners, generally work together to cover potential risks and get reinsurance, as they did this time.

Over the next 10 years, according to one federal official familiar with the trend, "They [Congress] took a good thing and stretched it too far."

Congress set financial responsibility requirements for other kinds of pollution damage: to coastal waters, then to inland waters, then damage caused by accidents at offshore and onshore marine terminals. In 1976 came waste disposal facilties; in 1980 trucks carrying hazardous cargo.

(Congress has also required insurance protection for operators of airlines and nuclear power plants, but these laws do not shift any regulatory responsibility to the insurance industry; rather they are designed to limit business' liability in case of accidents.)

Minimum coverage limits climbed as high as $10 million, and Congress cut back insurance companies' ability to refuse to pay claims. While some firms welcomed the chance to offer new lines of insurance, many balked.

Their worries are threefold. One, that the 3,000 property and casualty firms couldn't handle multimillion-dollar claims that might result from the 1976 Resource Conservation and Recovery Act. The law left it up to EPA to decide what limits--if any--should be set to cover waste disposal facilities.

The latter leaves insurers edgy. Undetected chemical leaks into soil or groundwater can poison people years hence. Between 1974 and 1980, most firms refused to cover leaks that didn't occur suddenly. The losses were potentially huge but no one knew how huge--and insurers hate uncertainty. Until 1980, only one underwriting group offered coverage for long-term pollution risks; a handful of others entered the market this year.

The second worry is perennial for insurance firms, which are regulated by the states. They fear the government will require potential polluters to get insurance, then the firms will persuade state legislators to make insurers cover all comers, instituting "high-risk pools" for bad operators like those for bad drivers.

Dave Lennett of the Environmental Defense Fund finds this fear unreasonable. "There's a perceived right in this country to drive a car," he said. "There's no right to operate a hazardous waste facility."

A third worry surfaced as the industry watched budget cuts at EPA. "It suddenly became very clear to us that the partnership we'd counted on having--in which EPA would do the regulating and we'd ratify their judgment by providing coverage--would not happen. We would end up the solo regulator," said Les Cheek of Crum & Forster Insurance Companies.

"We don't want insurers to be in that position," says Cummings. "But, without accepting the idea they would be substituting for public regulation, the private system can do the job more efficiently. They can support development of private expertise through the competitive market. In general, that's more effective than public regulation."