Happy New Year everyone! It was one year ago that I gave my first insurance predictions for the year 2002. For some, I was spot on and for others; I was way off the mark. Actually it's not that I was off the mark, my predictions were just too early.

So anyway, let's have a look at what I said. There was a general constriction of both limits and coverages available due to reinsurance cut backs, reinsurance treaties were late in being finalised. Several major natural catastrophes did occur but not to the extent I had predicted.

1. Hurricane Season to affect property catastrophe industry. In hindsight, I should have consulted the weather forecasters first because then I would have realised that 2002 was the year of El Nino and when El Nino occurs, hurricane season is pretty mild with colder winters and more snow. La Nina will be coming through next year so there will be increased hurricane activity in the Atlantic. Therefore, I believe the insurers will be in for a rough hurricane season.

Property cat writers did OK for 2002 but I think they will have a lot to think about in 2003 particularly those who do not have their aggregates sorted out. Exposure to concentrated risk in particular areas in the US will cause much grief particularly along the coastline of Florida and the Northeast as well as the Gulf Coast.

2. Anthrax - Anthrax still too soon for anything to happen as there is too much else going on to concentrate on it. The US has been distracted by: its war on terrorism, not capturing Osama bin Laden (by the way I was right on him remaining elusive and sending out videos to let us know he still exists and changing his tactics for his war on the US), sniper attacks, an unpredictable economy and corporate scandals to want to introduce anything more on anthrax. It's coming though and when it does it will show the danger came from within and was in fact nothing to do with Osama and crew.

3. Increased US scrutiny - Not only did the Bermuda insurance industry come under increased scrutiny from the US but the entire international business sector came under fire. First by the Patriot Tax issue surrounding corporate inversions and then by several large pension fund holders asking Standard & Poor's to delist companies with headquarters in Bermuda including ACE and XL who are Bermuda companies. Bermuda should be prepared for continued attacks and we must brace ourselves for the fact that these attacks will continue until the economy in the US improves.

The new chairman of the US Securities and Exchange Commission (SEC) is an ex Aetna executive. William Donaldson. Though many in the US are lauding his appointment, it worries me because he may come under pressure from his former colleagues to put the brakes on Bermuda. He may feel political heat to act on their behalf if he wants to retain his position. One saving grace about him is that he was a co-founder of investment banking firm Donaldson, Lufkin & Jenrette who in the past has been a great supporter of Bermuda. So hopefully he should have some knowledge about the benefits Bermuda provides globally, rather than from a "tax haven" perspective.

4. Lloyds - Lloyds has had its share of problems in 2002 but has managed to attract considerable capital, thanks to the volume of reinsurance it controls. Investors around the world recognise that allowing Lloyds to suddenly go out of business would completely disrupt the world economy. It will continue to struggle in 2003 as it tries to rebrand itself.

5. Increased IPOs - We will see more IPOs in the insurance industry in 2003, as it seems to be the only industry at present where there is investor confidence. Many insurance companies also recognize the need to 'make hay while the sun shines'. The hard market will not last too long for them. No one knows how or when the economy will improve. Therefore, the concept of cash flow underwriting (taking in as much premium as one can with the hope that investment income will improve results) may not be revived in the way it has been in the past for quite some time. In order to make some money they will become publicly traded companies. For those heavily involved with the property cat industry, my advice is to do it before the hurricane season starts in earnest because this will be a brutal season.

6. Terrorism Coverage - Terrorism insurance coverage mandated by the terrorism backstop passed by President Bush will create significant problems in the insurance industry because of the confusion about how to comply with it. State commissioners in the US will argue about what premiums are excessive and insurers will argue that for certain high risk accounts, they have to charge premiums that are high because they know they will have full limits losses. There will be great confusion created in the marketplace. Many of the new reinsurers in Bermuda will throw their hats in to provide reinsurance for terrorism but at very good rates. Rates that some insurers may find are too high for them to take.

Will the economy stabilise this year? It is my belief that with the pending war on Iraq, North Korea threatening to continue to develop its nuclear weapons, Iran hiding nuclear facilities, allegations that US ally Saudi Arabia has been funding terrorists, Latin American countries trying to stabilise their economies, Japan still trying to find its economic power again, Britain fighting to stay out of the EU and supporting the US' war against Iraq, that it will not! Especially if the US and Britain declare war on Iraq which is very likely after the weapons inspectors turn over their findings to the UN on January 27, 2003 because we all know Saddam Hussein is not telling the truth but is just using stalling techniques. And when the US and Britain declare war, France, Russia and Saudi Arabia will not support the war, Osama and crew will have an excuse to unleash holy war and the world will be in a state of disarray for quite some time.

The entire insurance industry managed to scrape by in 2002 despite the dire state of the stock market because of a relatively low number of catastrophes. 2003 will prove to be very different with a severe hurricane season, unstable global economy, and a possible war. Therefore insurers will be tested well beyond their means. It will be a challenging year across the board for both clients and insurers alike.

2003 will be one of the toughest years for the insurance industry and for the global economy. We will all breathe a sigh of relief when 2003 ends. It will prove to be a year of great uncertainty and we must brace ourselves for it.

Cathy Duffy will be on vacation for the next two weeks. Her column will resume on January 28, 2003.

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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