NEW YORK (Dow Jones News) -- Call it the $300 billion question.

The insurance industry is sitting on at least that much excess capital while a debate percolates over what to do about it. And the din has gotten louder recently as the capital surplus has burgeoned while industry growth has stagnated.

Some believe the capital surplus is burdensome in a mature industry in which growth depends largely on the economy's health.

But others think the issue is not one of too much capital, but rather of too many companies, with much of the surplus tied up in smaller, stagnant firms.

When viewed as a whole, the growth of the surplus is staggering. From 1986, the peak of the property-casualty industry's last profitable cycle, to the end of 1995, the surplus soared 144 percent, to $230 billion for that segment of insurers from $94.3 billion. Among life insurers, the statutory surplus went from $54.2 billion in 1986 to $124 billion in 1995.

As the capital base grows, some companies are feeling more pressure to manage it aggressively through share buybacks, strategic acquisitions and use of debt.

Although the industry claims several reasons for managing its capital conservatively, executives who ignore the pleas risk a depressed return on equity and downward pressure on their stock.

Many industry analysts are growing impatient with the sector's devotion to capital as a measure of industry status. "Even if they can't use it, they think if they show up with the biggest wad of cash in their pocket, they get to dance with the prettiest girl,'' said one.

But some executives and a few analysts don't buy the overcapitalisation theory. "The capitalisation in total is probably reasonable; it just appears excessive,'' said Fred S. Hubbell, chairman and chief executive of Equitable of Iowa Cos. "By having the capital spread among 1,700 life and health insurance companies, the effect is it's inefficiently deployed. It makes it harder to compete against the heavily consolidated industries like banks and mutual funds.'' Michael Smith, a Salomon Brothers Inc. analyst, believes the debate about overcapitalisation is intensifying for several reasons. "It's the frustration of an eight-year down cycle, generally poor performance as a group relative to the market and the appearance that it's grossly overcapitalised,'' he said.

Also, consolidation, which could help to redistribute capital to the more growing companies, "hasn't worked as quickly or as dramatically as people had hoped,'' Smith said. Although the pace of consolidation has been quicker in the last couple of years, it doesn't yet seem to have changed the capital surplus picture.

"I'm not sure much capital has been redeployed,'' said Peter E. Jokiel, chief financial officer for CNA Financial Corp., "because the companies doing the acquiring have maintained the capital base of the companies they acquired.'' According to Thomas V. Cholnoky, an analyst with Goldman Sachs & Co., in the last ten years about half of the increase in property-casualty capital surplus has come from realised and unrealised investment gains. About 30 percent has come from new capital -- companies' use of equity or debt markets. And only about 20 percent has come from underwriting income. Capital is being generated at a time when insurance, especially commercial insurance, is less in demand.

Insurers point to several reasons for guarding their capital. They are in the only industry that has to set a price for its product before its ultimate cost is known. Therefore, they need capital that can be shunted into reserves for outstanding claims.

But analysts say today's increasingly sophisticated ways of determining reserves put a dent in that argument.

Property-casualty insurers say their exposure to catastrophe risks requires quick access to capital. A few analysts agree with them. "Insurers have far more net risk on their books than they've ever had, because they have less reinsurance support,'' said Smith, the Salomon Brothers analyst. Smith doesn't believe the industry is overcapitalised, given the new risk scenario.

The traditional measure of how much capital a property-casualty company needs to cover its claims, the premium-to-surplus ratio, has fallen to its lowest point in recent memory. Rather than its former ratio of about 2-1, which means that for every $200 million in premiums written it should have $100 million in surplus, the figure is now just over 1-1.

Some observers, as well as the ratings agencies, believe the ratio is meaningless when viewed in terms of how much risk the companies really are exposed to.

Insurers also argue that if the pricing cycle ever rebounds, they will need the capital to expand. To that, Cholnoky cited the spate of offshore Bermuda catastrophe reinsurers formed to fill a need in that market after Hurricane Andrew in 1992. "This industry has never had trouble raising money,'' he said. Regulators and ratings agencies play a role in guiding companies' use of capital. Regulators demand certain levels of capital for solvency, and ratings agencies use capital levels to help determine claims-paying ability.