Recently several consumer advocate groups have declared it a tragedy that the US government is bailing out the rich and greedy insurance industry by passing the terrorism bill. These groups feel that the industry is overcapitalised and as such does not need the aid of government.

I beg to differ. It is more evident now than ever before that the insurance industry is totally undercapitalised and may be under-reserved not just for large catastrophes but all losses for a number of years. A look at what has been happening in the industry since September 11, 2001 illustrates why the industry is in trouble and needs to reassess its whole business philosophy to survive.

This year has been one of the worst performing equity markets in recent memory. Some say the insurance industry has been stripped of more capital than by the five largest catastrophes combined. On top of that it has had to deal with the terrorist attacks of 9-11, followed by Enron, Tyco and a whole slew of other corporate scandals, creating a crisis in Directors and Officers (D&O) liability insurance.

The recent winter storms in the US could cost the industry as much as $85 million, and the tornadoes that spun through the South in the summer are also estimated to have cost the industry around $85 million.

Asbestosis, a disease of the 1950s, is not only hanging on but is escalating to unprecedented heights (see my columns of March 25, 2001 and April 1, 2001 for history and development of asbestosis) and is consequently choking the insurance industry. Equitas, which was set up by Lloyd's to deal with the problem, is now admitting that its reserves may not have been large enough to take into account the escalating awards being given in the US for this old exposure. Pollution to a lesser extent is also causing great problems for the industry.

There is no question that the industry is in serious trouble: All of the worst-case scenario losses that an actuary or underwriter could dream up have been combined into one year. Each one of these events in its own right could have hampered the results of the insurance industry. Taken together, the results have been devastating and have left many insurance companies teetering on the brink of insolvency. What is most significant is that it is not just the small and obscure insurance companies that are affected. These events have touched practically every insurance company globally in some way or another.

There have been so many company reorganisations to try to structure companies to deal with the unprecedented catastrophes and equity market disappointments that it is almost impossible to keep track of them. Many well known senior executives, including chairmen and presidents, have been replaced as companies struggle to present the best possible picture of their potential for success during this trough in the industry. There have been several capital calls (selling of stock) in order to bolster the bottom lines of many companies to help them to meet their obligations to shareholders and clients alike.

Some companies are showing profits this year but not without very drastic changes to their corporate structures, the way they underwrite, and how they distribute shares. We have seen some of the strongest companies admit they would never have dreamed that an insurance year could be so bad. Clearly many have been caught off guard.

The industry is announcing cutbacks in certain lines of coverage and complete withdrawals from others. Capacity in some lines of business such as D&O has all but dried up in London leaving many insureds scrambling for coverage. Reinsurers are still en masse excluding terrorism leaving insurance companies and clients to go bare on this coverage, which we know could bankrupt the strongest of companies.

Is the industry overcapitalised? According to Thomas Holzheu, senior economist with Swiss Re Economic Research and Consulting: "In 2002, the global property/casualty industry had a combined ratio - losses and expenses as a percentage of premiums - of 110.2 percent, with returns on investment of 7.2 percent. In 2002, at a current investment yield of 5.2 percent, you need a combined ratio of 100 percent to achieve profitability."

On that basis the industry is not overcapitalised; in fact, it has been under-reserving for many years. It is only with the worst performing equity markets on record that the inadequate reserving practices of insurance companies have been exposed. Now it is up to the insurance industry to figure out how to get the numbers right on a go forward basis and how it can prevent the cyclical nature of the underwriting cycles from occurring. It seems that with every decade the industry faces a crisis and with each decade the crisis only magnifies in size.

Can the industry survive another cycle in the next decade that could be ten times the size of this underwriting cycle it faces today if it does not get the formula right? Soft underwriting cycles always last longer than hard ones because it has traditionally been easier to lower premiums than to maintain higher ones.

Therefore, I'm not so sure the insurance industry will survive if it does not change its traditional way of dealing with cycles. Whether we want to admit it or not, the industry is taking the place of the large corporations as the ultimate deep pocket. And guess what? Pockets, no matter how deep, eventually come to an end and then what happens?

On another note: Bravo to Finance Minister Cox for coming out with a strong reaction to the calls from several states in the US to de-list Bermuda companies from the S&P 500. Bermuda does have a voice!

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 crduffy@cwbda.bm