Q: Is the liability insurance crisis a crisis of company profits, of increases in the size of tort claims, of price or of coverage at any price?

A. Yes.

Item: Aetna Life & Casualty recently announced that it would write no more new commercial liability policies in Florida because premium-rollback proposals in the state legislature "would force us into a money-losing position."

Item: Notwithstanding the counterclaims of some consumer groups, liability awards -- particularly the bigger awards -- really are increasing faster than inflation.

Item: The Boy Scouts of America will start extracting a $20 surcharge from every Boy Scout troop and Cub pack in the country to help pay the organization's liability insurance, which has soared from $2 million a year in 1984 to $10 million in 1986.

Item: Pikesville, Md., just had its liability insurance cancelled, and a number of smaller jurisdictions have "gone bare" because their premiums have become too expensive.

But if all these things are true, says insurance expert J. Robert Hunter, it is also true that the main source of the liability insurance crisis is the insurance companies themselves. For instance, Aetna, which says premium-cost limitations will force it to stop doing new business in Florida, saw its profits increase by 348 percent in the first quarter of this year, according to a study done by Hunter's National Insurance Consumer Organization. Industry-wide profits are up an astonishing 1,227 percent.

Hunter, a private actuary and former federal insurance adminstrator, said in an interview yesterday that the key reason for what he termed "price gouging" is an up-and-down cycle in insurance company profits that has gone on since 1900. The latest cycle was triggered by a spate of insurance company investments turned sour by a decline in interest rates. He said the industry responded by boosting premiums and "dumping" lots of risks.

But doesn't that response fly in the face of basic economics? Isn't raising prices to the point of drastically reducing the number of customers the surest way to lose money?

Not necessarily, says Hunter. "The insurance companies 'dumped' a lot of their risks -- nurse-midwives, smaller jurisdictions and so on -- and still collected 26 percent more in premiums. You get an increase in the amount of money you take in while at the same time reducing your exposure to risk, and your profits are going to increase."

In addition, he said, there's "a certain inelasticity" in the market; mortgage holders require homeowners to have insurance; most jurisdictions force automobile owners to carry liability coverage.

Hunter, an unofficial associate of consumer advocate Ralph Nader, who helped raise money to launch NICO, said the insurance industry has two key goals: to get its profits back up to what it considers acceptable levels in the near term and to force tort reform in order to protect its long-term profitability.

"We expect they'll price higher for another six months or a year, then level off and start downward again. Why? Because when profits get to the range of 15 to 20 percent on investment, compared with general business profits of some 11 percent, some insurance executive is going to decide that a bigger market share is what he wants. Then you'll see a different kind of competition and a decrease in premiums."

So if prices are going to come down anyway, why is NICO working so hard to force that result?

"I just don't like the idea of having the economy screwed up every 10 years because the insurance industry shoots itself in the foot," Hunter said.

"I'm not saying that there aren't some things that have happened -- some unusual awards -- that are quite alarming. But nothing is happening that isn't actuarially predictable. Despite the aberrations, the law of large numbers still works."

What isn't working as well is the free market. Left to their own devices, the companies will maximize profits even if the result is that many former customers, individual and corporate, are priced out of the market. The solution, Hunter argues convincingly, is not so much legislating limits on liability as enacting tougher regulation of the industry.