James E. Saxton Jr., an Austin banker and longtime business activist, was named recently to head the Texas State Board of Insurance, replacing Paul T. Wrotenbery.

Republican Gov. Bill Clements appointed Mr. Saxton chairman of the three- member board, which oversees the $25 billion insurance industry in the state. His term for the $68,000 post runs through Jan. 31, 1995.Mr. Saxton, 49, is vice chairman in charge of retail banking and corporate director of Texas Commerce Bank in Austin, where he has worked nearly 20 years. Before that he worked for First National Bank of Dallas. He currently serves as chairman-elect of the Greater Austin Chamber of Commerce.

He also was an All-American halfback for the University of Texas Longhorn football team in 1961.

Mr. Saxton, a native of College Station, Texas, was replaced as chief executive at Texas Commerce a year ago. He had announced plans to retire from the bank in June.

Mr. Wrotenbery, who was appointed to the position in Many 1989, abruptly announced his plans in November to resign from the board, citing frustration with the structure of the board and his loss of faith in the state's regulatory system.

Since late 1988, all three members of the board have been replaced and several top agency executives have resigned.

Two legislative investigations revealed mismanagement in the handling of troubled insurance companies at the agency, particularly in the 1988 failure of the Dallas-based National County Mutual Insurance Co., which had a $50- million deficit. Critics complained that the regulators allowed insolvent insurers to continue operating too long.

Gov. Clements brought in Mr. Wrotenbery to revitalize the board. But Mr. Wrotenbery often found himself at odds with the two other board members, Richard Reynolds and Jo Ann Howard, over his attempt to restructure the agency.

Mr. Wrotenbery recommended that the power of the state board be reduced while the authority of the insurance commissioner to oversee the daily operations of the 1,500-employee agency be strengthened.

Last month he told a legislative task force that the current structure ''is an unworkable situation managerially."