For months now, Bermuda's insurance industry, the major engine of the Island's wealth and success, has been watching a storm off the Island's horizon.

Until now, the storm, the ongoing investigation into the insurance industry led by Attorney General Eliot Spitzer, has been at a distance from the local industry, even when it concerned US affiliates of Bermuda companies.

That has changed in the last few weeks, most notably with the dismissal by American International Group on Sunday of local insurance heavyweight Michael Murphy and the increased focus on the activities of AIG-affiliated companies in Bermuda, and particularly over the use of financial reinsurance, which was largely pioneered here. The storm has now arrived.

No one should be in any doubt that this poses a threat to the reputation of the local insurance industry, and with it the health of the Island's economy.

It is worth noting that the insurance industry's attitude has changed dramatically since Mr. Spitzer began his probe. At the outset, he was largely dismissed and his motivations was attributed to his ambition to become Governor of New York in the 2006 elections.

No one seems willing to dismiss Mr. Spitzer now. More importantly, many of his investigations do seem to have some validity. He exposed price-fixing between insurers and insurance brokers, including between ACE Ltd.'s US operations and Marsh & McLennan.

He has also forced many brokers to change the way they received commissions from insurers with whom they did heavy volumes of business. And he has now exposed how insurers, notably AIG, were able to "smooth" earnings from one quarter to the next by allegedly shifting losses off their balance sheets.

In the process, he has also brought down a slew of insurance executives, including Maurice (Hank) Greenberg, the chairman and chief executive of AIG, and one of his sons, Jeffrey, who was chairman and chief executive of Marsh. The other son, Evan, remains chief executive of ACE.

All of this has broad ramifications for how the insurance industry does business and for Bermuda.

There is a strong perception that insurers have been able to use insurance affiliates in Bermuda and elsewhere to misrepresent their results. The perception also exists that they have been able to do this because places like Bermuda are less heavily regulated than they are in the US.

Bermuda's insurance sector has long prided itself on its system of self-regulation in which the industry and Government work together to develop laws and rules that protect the client and the insurance provider without the often cumbersome and intrusive layers of regulation that hamper innovation and enterprise in larger jurisdictions.

However, it is likely that this system will now come under greater scrutiny from abroad because of the recent spate of scandals. It is vital that local regulators and the insurance industry demonstrate that they are aware of whatever problems that may have arisen and will not tolerate damage done to the Island's good name.

At the same time, it is important that the Island not throw the baby out with the bath water. It must be nade clear that where abuses have taken place they will not be tolerated. But the industry needs to assure first itself and then the wider community