THE United States insurance industry failed to win approval this week for its plan to rescue the Executive Life Insurance Company. But a larger question remains: Can the industry rescue public confidence in its financial soundness?Echoing the problems faced by the nation's commercial banks and savings and loan associations, many life insurance companies have seen investments go sour at a record pace. Two big insurers failed earlier this year: Mutual Benefit Life Insurance Company in New Jersey and Executive Life in California, which in April became the largest US insurer ever to fail. "This is a peak year for insolvencies" in the life insurance industry, says Mark Puccia, senior vice president of Standard & Poor's Corporation, which rates companies' financial strength. But he says the industry as a whole remains sound. Unlike banks and thrifts, insurance companies do not have a federal agency to rescue them if they get into trouble. The industry has been regulated at the state level since the 1800s. Some lawmakers in Washington are considering new federal standards to monitor industry solvency nationwide. Insurance companies do have a safety net of sorts: They pay money into state funds that protect policyholders when companies go under. In the case of Executive Life, these funds put together an extraordinary plan to take over and manage the failed company. Twenty big firms, many from New England and New York, agreed to set up a $1 billion credit line to fund the takeover. On Wednesday, however, California insurance commissioner John Garamendi said the industry's plan was unworkable, and that the state would turn Executive Life over to one of two private bidders to be named next week. "While I appreciate the life insurance industry's unprecedented cooperative campaign to salvage Executive Life, their proposal falls short of guaranteeing policyholders the rock-solid protection they deserve," Mr. Garamendi said. Garamendi had initially favored the industry plan over other bids, but he said the rescue plan was vulnerable in the event of a big drop in the value of Executive Life's junk bonds. It was these high-yield, high-risk bonds that caused the company to fail in the first place. Junk bonds currently amount to almost two-thirds of the total assets. By selecting one of the other bids, Garamendi will remove a major uncertainty for policyholders, says Martin Weiss, president of Weiss Research, which rates insurance companies' safety. Many insurers have seen their safety ratings drop in recent months, rousing consumer worries that the industry may be following thrifts and banks into deep trouble. Mr. Puccia, however, says the industry by and large is in good shape. "An incredible amount of capital has been coming into the industry," a sign that companies are repositioning themselves to absorb their losses and remain strong, Puccia says. "The industry has done a poor job of presenting its strengths." Of the 169 biggest life insurers, making up 90 percent of the industry in terms of assets, only 23 (13 percent) are rated "weak" (D-plus or lower) by Weiss research. Still, the industry's problems with junk-bond and real estate investments have state regulators moving to tighten standards, and lawmakers at the federal level considering regulation. While junk bonds only account for 6 percent of the industry's total assets, cases such as Executive Life's have revealed a need for tougher regulation, says Earl Pomeroy, the insurance commissioner for North Dakota and a former president of the National Association of Insurance Commissioners (NAIC). Many states, led by New York, have put a cap on the percentage of junk bonds in a company's portfolio. A new California law puts the ceiling at 10 percent. "It's the clear regulatory trend," Mr. Pomeroy says. But most states do not have such limits. Meanwhile, Rep. John Dingell (D) of Michigan is working on draft legislation in the House Energy and Commerce Committee that would set solvency standards at the federal level, while leaving states to regulate other industry matters.