On October 3, 2002, the Organisation for Economic Cooperation and Development (OECD) announced it was stepping up oversight of the reinsurance industry because of growing concern about its financial stability.

The OECD consists of 30 member countries and is an international organisation, which helps governments to tackle the economic, social, and governance challenges of a globalised economy.

Because the reinsurance industry is the backbone of the insurance industry and allows for the law of large numbers and the spread of risk among many players to work, I am gravely concerned that if the OECD feels it must take this measure; the reinsurance industry must be in serious trouble.

My greatest concern arises from the fact that insurance and hence reinsurance has become such an integral part of the business world.

And without insurance how will the business world continue to operate?

The OECD has agreed to open up dialogue between countries to better facilitate transparency and to "protect the integrity" in the insurance market by exchanging information on matters relating to the activities and solvency of reinsurers.

What does this mean in the real world? And how will a member country of the OECD cope should one of its own reinsurers be in real financial straits? Some of the largest reinsurers in the world are headquartered in the 30 member countries of the OECD including SCOR in France, Swiss Re in Switzerland, American Re in the US, Equitable Life in the UK and Munich Re in Germany. How will conflicts of interest be handled?

What will the OECD do when it uncovers bad apples in the barrel? Are other member countries required to bail out the reinsurance companies that are in trouble?

I am also very concerned at how little attention has been drawn to this OECD initiative because it could resonate through the global economy.

The OECD states in its press release: "Reinsurance firms perform an important business function by providing wholesale cover for the risks assumed by insurance companies on behalf of their clients.

"Besides insuring insurers, reinsurers are also major financial intermediaries and institutional investors. Their integrity is essential to the stability of the financial sector. They operate in a global market where their activities are often not subject to prudent oversight."

There has been a rising number of cash calls (methods by which companies can raise funds, i.e. selling company stock) for insurers and emergency injections of capital from parent companies into their subsidiaries lately. What's more worrying is that the companies are not small, unknown ones. They are big name companies like Munich Re injecting capital into its beleaguered subsidiary, American Re, Credit Suisse injecting capital into its subsidiary Winterthur. Zurich Financial Services, Swiss Life and other large insurers have also announced cash calls.

The common reason given for the poor results of the insurance industry is the fall in equity markets combined with poor underwriting results.

European insurers are in worse shape than their American counterparts because according to Moody's, European insurers still hold 30 percent of their assets in equities, compared with only four percent for American insurers.

A very frightening prospect indeed, because according to Standard & Poor's, the reinsurance market which wrote 29 percent of the total $98 billion in reinsurance premiums written last year was Germany, followed by the US which accounted for 27 percent, then the Swiss and UK firms each accounted for nine percent while the Bermuda reinsurance industry accounted for eight percent.

To show the seriousness of the problem facing the reinsurance industry, reinsurance giant, Munich Re, was downgraded from its triple A rating.

Munich Re is one of the largest reinsurers in the world. If Munich Re is in trouble, what chance does the rest of the reinsurance industry have? Also Moody's stated that it had a "negative long-term outlook" for the overall stability of the reinsurance marketplace.

Traditionally, the reinsurance industry has been left unregulated. However, because society now recognises its importance to the financial stability of the global economy, it is rightly receiving a lot of attention.

Whether it should become regulated is another matter. Too much regulation creates too much red tape, which ultimately strangles the flexibility companies need to be able to respond swiftly to market changes. If the OECD initiative remains as a means to collect and analyse data as well as act as watchdogs over the industry to send up early warning signs then I agree its purpose is justified. However, if it begins to impose strict and onerous regulation on this very important industry, I say forget it.

We cannot afford to force companies to want to find loopholes in a strict regulatory process, as has been the case in the very high profile bankruptcy and fraud cases in the very regulated United States and the United Kingdom.

Members of the reinsurance industry, including those in Bermuda, must make an effort to return to what makes them profitable - good and sound underwriting practices.

They should have learned by now that dependence on the stock market will not help them when the going gets tough.

If they haven't learned this all too important lesson by now, then they will almost certainly become subject to regulation that will ultimately hinder their growth in the long run.

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