Some insurance companies around the world are blaming the new capacity in Bermuda for rates not being as high as they had anticipated. I don't agree with this reasoning.

As a matter of fact, I believe the reason the prices are not as high as some insurers anticipated is because insurance buyers are now more savvy than they ever have been. Risk managers, Treasurers and those who buy insurance for their companies have grown a lot wiser.

Over the last thirteen years of a soft market, each insurance company and broker was trying to prove their worth by introducing clients to Alternative Risk Transfer products. For thirteen years, clients have been educated about self-insured retentions, captives, securities, hedging, swapping and the list goes on. Clients know about the alternatives to traditional insurance buying and as a result will no longer accept huge price increases because of poor underwriting decisions made during soft markets. Many insurers were poised for huge increases when the market suddenly turned bad as a result of September 11, 2001.

Many, though they never expected the magnitude of September 11, 2001, felt it was going to be their saving grace because finally they had the excuse to increase prices as high as they wanted. Many felt they would be able to make up for underwriting losses, poor investment results and low premiums by giving as much as 100 percent price increases. What they forgot was that in the 1980s when the market was hard, many Fortune 500 companies with the help of Marsh and McLennan got together to form two companies, which would respond to their needs, XL and ACE. These companies were created so clients could escape the horrendous rates, unavailability of coverage and high retentions that the market was trying to shove down their throats. So it is not the new capacity that is causing the price increases to be moderate across the board, it is actually the start of alternative insurance buying in the mid 1980s and thereafter that has caused the capping of price increases. No longer were insureds going to accept whatever terms, conditions and prices their insurers tried to force them to take. They began for the first time to take matters into their own hands. Insurance companies now have to accept that as a result of the events of September 11, 2001, the insurance industry has been brought out into the open. Way out into the public eye. Many people now want to understand it and figure out how it fits into the big picture.

No longer will the insurance industry be shrouded in mystery. Insurance buyers want to know more. They are not going to accept what is told to them. They also know and have read about the vulnerability of the insurance industry. Reports have been circulated about the insurance industry having $300 billion in total assets. When you divide the total assets of the insurance industry by the number of insurance companies, the result does not equate to a huge amount to be paid out by insurers. Many clients are questioning if there really is enough insurance to go around. Some of the larger Fortune 500 companies are now looking at ways to take the peaks and troughs out of the insurance cycles and to find what they consider to be a comfortable premium so they can budget for their insurance premiums year to year. They do not like the surprises they get from insurers when their risks have not changed much from year to year but suddenly they are being penalized because of a turn in the market. In addition, many are looking at ways to accumulate their own funds to pay for their own future losses rather than funding insurance companies who may not be around when these companies have claims.

Some in the industry may argue that XL and ACE were created to take the peaks and troughs out of the insurance business in the mid 1980s. But it was the clients who blew it when they wanted to follow the market prices down instead of sticking to the middle of the road price offered to them by XL and ACE. What is the happy medium is the question that both sides need to figure out if insurance is to continue to work in its present form? Whoever is to blame for the state of flux the insurance industry finds itself in now, does not matter. What matters is insurance companies on a go forward basis accepting that they must get their prices right from the beginning and not try to increase pricing beyond what is reasonably sound just because they think they can.

The days of price gouging by insurers during hard markets and price deflating by insureds during soft markets need to stop because the industry has been tested for the first time with a loss as large as September 11, 2001.

The industry and the insureds have seen for the first time the vulnerabilities of both sides exposed. Now is the time to establish what price is fair and stick to it. So the new capacity in Bermuda is not to blame for the price increases not being as large as many predicted. But rather it is the industry and the insureds that are both responsible. Both sides are growing wiser to the meaning of insurance. And as a result both sides need to accept responsibility for what has happened to insurance purchasing and work out a solution that will work to their mutual benefit in the future.

Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and is now a freelance writer. She is a former executive of Zurich Global Energy and has 15 years experience in the insurance industry. She writes on insurance issues in the Royal Gazette every Monday. Feedback crduffycwbda.bm