I've just returned from a three-week vacation in the Lake District in England. Unbeknownst to my husband and I, the house we rented had no telephones and the lines of communications were generally poor to the outside world.

Therefore, on my return, I had to take some time to read through the 200 e-mails, which were waiting for me, to see what has been happening in the real world. I must admit it was a real chore getting through them. Sometimes it's great to be able to turn off from the real world but the downside is when your job requires you to stay up on current events, getting back into it can be a real shock to the system.

The recurring topic is the pending war against Iraq. A recent report completed by Conning Research & Consulting in Connecticut states that the US insurance industry is undercapitalised by some $38.5 billion - more than double the amount estimates revealed for the industry in the previous year. This report should have many worrying about the future of the insurance industry because the US insurance industry is one of the largest marketplaces in the world. If it is undercapitalised, by how much is the rest of the marketplace?

The results of the industry will be further depressed this year if there is a war. Whenever there is a war, the economy falters because the majority of us tend to go into save mode rather than spend. When we do this, it slows down the economy because there is not enough money in circulation to meet the demands of our everyday continuance. This then causes a downturn in the stock market because most people tend not to want to take risk with their investments at this time either. Some even begin to stash money under the mattress just in case.

This war will probably have a worse effect on many of us psychologically than previous wars because no one is yet sure about how the "terrorist sleeper cells" around the globe will react to this war particularly since some of the radical Muslim groups are implying that the war is President Bush's way of doing Israel's dirty work to the Arab nations.

The scary part about the sleeper cells is that no one really knows where they are or what resources they have on hand to unleash deadly destruction. This fear is obviously paramount in the minds of French President Jacques Chirac and German Chancellor Gerhard Schroeder who have both publicly stated that their countries would do whatever is necessary to prevent the world going to war. Even if it means using their right to veto the US' attempts to have the UN agree to allow them to go to war with Iraq.

Russia is leaking information that they have evidence that the US is planning to go to war in February. It may be doing this to spark a reaction from the rest of the world in an effort to resolve this spiralling problem. The world is scared of this war because of the unprecedented backlash that could result from it.

President Bush seems keen to go to war, having sent some 15, 000 troops to the Gulf already and is expected in his January 28, 2003 address to the US to advise Americans to prepare for war.

The world teeters on a dangerous precipice at the moment and the insurance industry stands to lose greatly until there is some resolution to the economic and social crisis that is gripping the world.

As long as there is the threat of war, the economy will continue to be unstable and when the economy is unstable, the stock market is unstable therefore yielding poor investment returns to investors. The insurance industry is especially vulnerable to the stock market because a tremendous amount of its growth comes from the investment income it generates from premiums collected. There is even the danger that the capital markets could collapse if the economy does not stabilise.

So for an industry that is playing catch up for a decade of poor underwriting pricing, the threat of war or war itself is bad for its bottom line.

The only saving grace for the industry is that should the world become engulfed in a war and a terrorist attack occurs as a direct consequence of the war, there is the possibility that the industry will be able to invoke the war exclusion. However, the new terrorism bill which was passed in November in the US does not make it specifically clear if in fact an insurer has the right to invoke a terrorist exclusion should a terrorist attack occur after the war begins.

The pending war and the uncertainty it presents to the world illustrates just how linked the insurance industry is to the global economy. What will this year bring? How many insurers will be able to make it through this tough time when the insurance industry's state is already quite precarious? Despite insurers and reinsurers charging very high rates with many exclusions, the US industry is still undercapitalised by $38.5 billion.

The greatest shortfall for the industry has been the continued bear market befalling the investment community. When there is a bear market, yields on investment tend to very small. Consequently regardless of the double digit premium increases insurers are getting from insureds, they are not getting enough premiums in fast enough to make up for the shortfall.

Consequently, if there are further terrorist attacks or any major catastrophe this year in the current environment, we could see a very different and much smaller insurance industry next year.

The world is at a crossroads. The industry is at a crossroads. Instead of markets looking down on each other, global solutions should be sought to help stabilise the world because it could be a long time before the economy stabilises.

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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