OPL and Scandinavian Re, both reinsurance companies, are victims of the overcapacity that plagued the reinsurance industry for the last 13 years.

During this time, reinsurers were thought to be immune to low insurance premiums, litigation explosion, and the growing environmental, asbestosis and workers compensation losses prevalent in the direct markets.

As a result, many reinsurers wrote coverages for clients that they should not have because they thought they were a step removed from the issues that plagued direct insurers.

Peggy Berton, the president of CNA Global Resource Managers, said in a speech at the Mealey Conference in April of 1997, "reinsurance was perceived to be a gentleman's agreement where handshakes were enough to seal a deal, utmost good faith was a way of life and the 'follow the fortunes doctrine' was well understood."

Some years later, the very same culprits that eroded the primary markets such as globalisation, fierce price competition and the merger of many reinsurers have opened the Pandora's box to the concept of insurance spiralling.

Spiralling, in simple terms, occurs when insurance is reinsured within the same entity, therefore not allowing the spread of business amongst many insurers/reinsurers desperately needed to handle a large loss or high frequency of losses.

Spiralling goes against the fundamental concept of how insurance is meant to work. The definition of insurance is the spread of risk amongst a large enough group to allow the insurer to remain whole in the event of a claim.

The introduction of spiralling, globalisation, mergers, securitisation and a prolonged soft market have caused the major problems we see today in the insurance industry.

Just when reinsurers thought they were about to see an upturn in the industry when the market started to harden in 2000-2001, September 11 and Enron occurred back to back.

These catastrophic events deepened the already poor underwriting results industrywide caused by an unprecedented number of catastrophes, both natural and manmade, that occurred in the industry from 1989 as well as the poor performance of the stock market.

Therefore, the breathing space that reinsurers, including OPL and Scandinavian Re, were looking for was not long enough to give them the time to recoup premiums they lost over the span of two decades in a very soft underwriting cycle.

Instead of undertaking an aggressive underwriting stance to try to write as much premium as it could in this hard market, it seems that OPL decided that because of the volatility of the stock market and the insurance industry, the best it could do is to return capital to its shareholders in an orderly fashion.

Its decision was probably exacerbated by the fact that in the long term it would not be able to continue to give shareholders good returns based on its current portfolio mix.

A.M Best stated that "the commercial lines and reinsurance sectors were the hardest hit, suffering significant downturns in operating cash flows" during the soft underwriting cycle.

Is run off a bad thing? The answer to this question depends on which side of the fence you sit. Runoffs are likely to become more prevalent now due to the state of flux the market currently finds itself in.

It seems that since the late 1980s, the insurance industry has faced progressively deteriorating underwriting results with many more catastrophes than in previous decades. Last week was not a great year due mainly to manmade catastrophes for the industry either.

It used to be that companies had a few years of breathing space when they initially began operations or between the time a claim was first made to the time it was settled. However, now with the sense of urgency we all live in lawsuits are settled much quicker than they were in the past, which means clients, are demanding much quicker payouts.

As a result of the expediency of payments, insurer's cash flows are significantly reduced. Take for instance, XL Capital's and ACE's recent announcement that they have reached an agreement to settle the claim filed by Silverstein, the leaseholder of the World Trade Center.

This settlement has been handled in record time therefore both these insurers will show huge hits to their cash flow in the short term as a result of the $366 million payout they have to make to Silverstein. In the past, this claim would have taken much longer to settle.

Natural catastrophes are causing greater damage because of where we have chosen to live, i.e. along coastlines and in earthquake zones. This in turn forces companies to make quick payouts to right the wrongs of nature. This phenomenon again reduces the income stream, which in turn reduces the share value to shareholders in the short term.

Now, with the terrorist attacks, the distinction between maximum probable loss and maximum possible loss exists no more, which in turn has caused many insurers to preexamine their ability to remain in the market for the long term.

The insurance arena has changed so dramatically that many must now determine if they have the staying power to make it through the insurance cycles and return a profitable yield to their shareholders without jeopardising their underwriting integrity.

In my opinion runoffs, though bad for employees of the company because they lose their jobs, can be good for shareholders if they are handled professionally and efficiently.

A runoff can be viewed as an exit strategy for a company rather than facing liquidation (bankruptcy or insolvency).

Runoffs allow shareholders to recoup some of their investment over time. In making the decision to go into runoff, the insurer can still honour its claims payments to its clients rather than if it were to declare bankruptcy.

Once an insurer declares bankruptcy, it then must relinquish all control to the hands of the liquidators, which may not work in favour of the shareholders and clients.

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.