The recent decision by ACE Ltd. to cut back on its capacity at Lloyd's of London is a telling sign that may be serious trouble on the horizon for Lloyd's. Because Lloyd's underpins so much of what makes the world go round, it spells trouble for the global insurance industry and the global economy if a solution is not found.

It also spells a huge opportunity for the Bermuda international insurance industry if it can get its act together and work as a cohesive marketplace. Currently Lloyd's controls a significant share of the global reinsurance marketplace. Should it collapse, a huge void would be left in the global economy because without Lloyd's capacity, some industry groups would be brought to a standstill. Bermuda is one of the few marketplaces in the world with enough new capital to respond to the Lloyd's crisis.

Therefore, the Bermuda insurance marketplace should be looking at ways to supplement the diminishing Lloyd's capacity in an effort to rescue those who will be left uninsured. However, the Bermuda insurers cannot and should not do so until they have tried to resolve the problems which have plagued the 300-year-old institution.

I don't think people understand the scope or significance of the trouble Lloyd's currently finds itself in and how it would impact our everyday lives should it fail. Fortunately for the majority of corporations and the economy, a significant volume of business and debt was pulled out of Lloyd's in 1996 when Equitas was formed to take all of their old liabilities (losses and reserves).

The fact that ACE is reducing its capacity in Lloyd's, shows, in my opinion, that the Lloyd's underwriting institution still has not come out of the dark ages and has not recognised that the days of cloak and dagger transactions are no longer acceptable. Lloyd's needs to come clean on how insurance is really transacted there if it wants corporate investors to save them from bankruptcy.

What is killing Lloyd's is reinsurance spiralling. Some knowledgeable people in the industry feel that the underwriters at Lloyd's are more brokers than they are underwriters. By this, they mean that rather than accepting the full risks of an account the underwriters chose to underwrite, they often reinsure the bulk of the risk out and in some cases they reinsure the risk back to themselves before they realise what they have done. As a result when there is a large catastrophe, underwriting syndicates and often the same Names are paying on a loss more than once.

In the past, the likelihood of a catastrophic loss occurring was minimal. But we all now know that it is not improbable or impossible. As a result of the litigious society we live in, the places we choose to live in, the strong possibility of further terrorist attacks and the current state of the economy, insurance spiralling can no longer be tolerated.

Transparency is what clients and investors are looking for particularly in light of the new certification requirements by the US government and the Sarbanes-Oxley Act passed in the United States. This Act requires chief executives and chief financial officers of all publicly listed companies regardless of size to give personal assurances that accounts are an accurate portrait of the financial viability of the company. It also requires the accounts to be certified whenever a company makes a filing with the SEC. Therefore, it places enormous pressure on the CEOs and CFOs of companies to make sure their accounts are a true reflection of the company and it will ultimately increase the liability of non-executive directors.

As a consequence of the certification requirements of the US government and the new Sarbanes-Oxley Act of 2002, no chief executive officer or chief financial officer in his right mind is going to want to sign off on the accounts of Lloyd's syndicates if he doesn't understand where the trail ends for insurance transactions. Nor is he going to want to have to face the embarrassing fact that he had no idea that his company's balance sheet was inaccurate because of reserving inaccuracies resulting from reinsurance spiralling.

ACE is one of the few companies that has agreed to voluntarily sign off on its accounts to the US government even though it was not amongst the list of 947 companies required to certify their accounts. ACE's move, in my opinion, shows it is conducting its due diligence to make sure its books are not being cooked whether intentionally or not.

Some feel that Lloyd's has only about five years left before its past liabilities catch up with it. A very scary and worrying thought to me if no one is there with a game plan to tackle the void.

Imagine if Lloyd's in five years did declare bankruptcy - Lloyd's controls a significant portion of the speciality market including airlines, tankers, and most transportation risks, how would we all travel and go about doing what we need to do? Someone needs to be thinking really hard about how to tackle Lloyd's problems.

Whether we like it or not, insurance/reinsurance has become an integral part of what makes the world go round. If Lloyd's problems are not handled correctly, the whole face of insurance and reinsurance as we know it today would change forever.

Bermuda insurers and reinsurers with lots of new capital combined with strong capital from the incumbent carriers are in the enviable position of being able to respond. However, the only way a strong marketplace can be achieved is if the individual insurers that make up the marketplace sit down in a round table discussion to develop a plan.

The market must be sure not to create the same problems which plagued Lloyd's. There can be no spiralling of risks. There must be transparency. There can not be an us against them attitude. All of the individual companies that make up the Bermuda insurance marketplace must work together to allow the Bermuda international insurance to become the force it can be in helping to keep the global economy afloat.

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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