What a year...

1. The US terror attacks
Tumbling share prices and rising liabilities arising from the World Trade Centre attacks have delivered a severe capacity shortage in the insurance market, along with soaring rates for many classes of business.

Although the increased rates mean that, for the first time in years, underwriting could become profitable, the immediate effects for the insurance industry are strongly negative.

Shares across the insurance sector tumbled 27% after the terrorist attacks, and although there has been some recovery, the sector's market capitalisation and solvency margins have both suffered badly.

Insurers CGNU and Royal & SunAlliance (R&SA) saw more than £10bn wiped off the value of their shares since highs earlier in the year.

HSBC insurance analyst David Hudson said the cost of the stock market crash was about six times higher than the direct costs from the attacks.

Many insurers are revising upwards their forecasts of losses from destruction of the World Trade Centre. Others face the threat of lower credit ratings Lloyd's is said to have underestimated its losses from the September 11 US terrorist attacks by £400m, according to analysts Fitch.

Lloyd's forecast the attacks would cost it £1.3bn, or 12% of its capacity, but now accepts the figure will probably rise. Analysts Fitch believe the market stands to lose at least £1.7bn, or 15.4% of its capacity, after seeing "confidential information".

Fitch downgraded Lloyd's financial strength rating from A+ to A- in the wake of the attacks on the World Trade Centre and warned the rating was liable to fall further should the losses turn out to be greater than initially forecast. It argued losses from large catastrophes "have always been understated".

2. The collapse of Independent Insurance
While many in the industry said, with admirable hindsight, they had seen it coming, the collapse of Independent was a shock to nearly everyone.

The company is now being investigated by the Serious Fraud Office amid allegations that its liability business was vastly under-reserved, claims were incorrectly recorded and business was dramatically under priced.

Insurance Times reported that the Financial Services Authority (FSA) was warned as far back as December 2000 by its French counterpart that Independent's French company was reserving claims for virtually nothing and not entering other claims at all.

The Policyholders' Protection Board (PPB) is now facing compensation claims from about 200,000 of Independent's personal lines policyholders. It has paid out more than £2.3m so far, with "hardship" cases being paid first, particularly those involving urgent home repairs and employer's liability.

Other insurers have taken on parts of the business, notably R&SA, which brought Independent's loss adjusting company Property and Casualty Services (PCS) for £3m.

3. Floods
General business claims totalled £840m for the first quarter of this year, with weather damage making up 38% of that, according to Association of British Insurers' (ABI) figures.

Last month the Liberal Democratic Party called for a national task force to improve the UK's flood defences.

Speaking at the party's conference in Bournemouth, Malcolm Bruce said last year's floods were "a devasta-ting wake-up call to the laughable nature of the UK's flood defence strategy". He said more investment in flood defences was vital, but it needed to be overseen by a single body. "It is unbelievable that the Environment Agency doesn't have the overall responsibility for flood defence management and planning."

Flood plain maps released by the Environment Agency show that two million properties are at risk and British Market Research Bureau data has shown that more than half of the people who live on flood plains are unaware of their at-risk status.

In January it was reported that UK household insurers would withdraw insurance from homes on flood plains within two years if the government failed to toughen planning rules and fund new flood defences.

The ABI is calling for the government to double its spending on flood defences.

4. The foot-and-mouth outbreak
Insurers and farmers rubbished government suggestions that farmers should be forced to insure themselves against future outbreaks of foot-and-mouth.

Food minister Lord Whitty suggested the move after the government paid out millions of pounds in compensation to farmers, some payments topping £1m.

But most insurers are refusing to offer any cover for foot-and-mouth. Only 10% of farmers have been able to renew their policies and those are facing soaring rates.

Since the outbreak, NFU Mutual, the largest insurer of farmers, has not been taking on any new business and admitted it was planning to increase renewal rates.

The Department of Environment, Food and Rural Affairs said compulsory insurance was just one of the avenues being considered to avoid compensation payouts in the future.

Another option is the creation of a central insurance fund, into which both farmers and the government would pay.

5. The collapse of Chester Street
In January, a surge in asbestosis claims pushed Chester Street Insurance Holdings into insolvency, leaving thousands of industrial-disease claimants uncertain if they will get compensation.

PricewaterhouseCoopers (PWC) partners Dan Schwarzmann and Colin Bird were appointed provisional liquidators of Chester Street on January 10 after a review of the company's financial position by its board of directors.

They found its assets of £30m were dwarfed by its liabilities of £250m.

The insurance industry agreed to cover part of the cost of Chester Street Insurance's collapse through the new Financial Services Compensation Scheme (FSCS).

There had been worries that some asbestosis sufferers would miss compensation because many policies written by Chester Street related to injuries incurred before the Employer's Liability (EL) Act came into force in 1972. Pre-1972 EL claims are not covered by the PPB.

Under the scheme, the PPB will pay 100% compensation if the award was made before the liquidation of Chester Street on January 9. If the award was made after January 9, the industry will pay 90% of the money awarded.

It was reported that the industry's relationship with the government could have been badly damaged had the industry not paid compensation.

The ABI admitted in a letter to members, sent by general insurance council management committee chairman Ian Chippendale, that failure to reach a compensation deal would have "coloured the new government's perception of the industry in the same way that pensions mis-selling did the previous government's".

6. The after the event insurance debate
A series of landmark court cases passed through the courts this year, clarifying no win, no fee.

The message from the Callery v Gray and Sarwar v Alam judgements seems to be that liability insurers must bear the burden of the claimant's reasonably incurred additional liabilities. These can include after the event (ATE) insurance premiums and success fees, in the event they lose the case or if they settle on such terms that the defendant pays the claimant's costs.

President of the Association of Personal Injury Lawyers (Apil), Frances McCarthy, said the cases of Callery and Sarwar had brought much needed certainty to the issue of funding, although there was still a great deal to resolve.

7. Lloyd's capacity
Even before the WTC events, Lloyd's syndicates were reported in August to be running out of capacity as rates soared by up to 400% on certain lines of business.

A handful of syndicates are now turning away risks or issuing warning that capacity is drying up.

HIH Cotesworth's two syndicates 535 and 1688 have been casualties.

8. Claims Direct
Claims Direct chief executive Colin Poole and co-founder Tony Sullman hit the headlines many times this year - most recently after they agreed to sell some of their shares to investor Simon Ware-Lane, giving him a 29.8% stake in the company. Ware-Lane, who owns smaller rival Claimline, will now take control of Claims Direct.

As part of the agreement, Poole and Sullman resigned immediately from the board.

Claims Direct saw its share price tumble from a high of 353p to 8p this year and Poole and Sullman offered to buy the company through Barker Securities for a cash price of 10p a share.

The duo had floated the company in July 2000 from 180p a share.

9. Selby train crash
Fortis Insurance faced the largest claim in motor insurance history, as it insured the Land Rover involved in the Selby rail crash in which ten people died.

It has yet to admit liability for the £40m accident, despite the driver being charged and claims relating to the March disaster are still being processed.

But claims director Alan Sendall confirmed the insurer will pay out for claims relating to the injured and deceased. He expected the bill to run into "tens of millions".

Gary Hart, the driver of the vehicle, plunged 150ft down an embankment from the M62 after his vehicle, which was towing a trailer carrying a Renault, missed a motorway barrier. He got out and called police on his mobile phone but, 40 seconds into the call, he saw the 4.45am Newcastle to London express hit the Land Rover.

The train remained upright after hitting the vehicle, but then collided with an oncoming coal train. Among the dead were the two drivers of the coal train, the express driver and two other GNER staff. A total of 76 people were taken to hospital.

The claims resulting from the Selby train crash put a £1.5m dent in the first quarter profits of Fortis Insurance.

The Belgian bancassurer revealed it had retained £1.5m of the third-party liability stemming from the Selby crash, as the insurer of a driver whose vehicle collided with a high speed passenger train.

Fortis UK is to absorb £1m of the liability, with Fortis International assuming the remaining £500,000 cost.

Its reinsurers, which include Munich Re, have unlimited third-party liability.

10. GISC Rules stall
The General Insurance Standards Council (GISC) had to postpone the implementation of its Rule F42 after the Institute of Insurance Brokers (IIB) won an appeal in the Competition Commission Appeals Tribunal (CCAT).

OFT director general John Vickers had thrown out the IIB's complaint against Rule F42, which allows insurers to cancel agency agreements with non-GISC member, brokers and intermediaries, in May.

But the CCAT 75-page finding said Vickers was "erroneous in law" to give the GISC negative clearance under the Competition Act 1998.

It now looks like Rule F42, which has already been postponed twice by the IIB appeal, cannot be introduced until late 2002.

11. Groupama
In July, Groupama Insurances announced it was being put up for sale by its French parent following a review of its international operations.

At the time of going to press, no buyer had been announced and analysts were sceptical of whether it would find a buyer before its stated deadline of December 2001. This was because insurers had already snapped up additional business following the collapse of Independent Insurance.

12. Cotesworth
At the beginning of September, one of the oldest insurers in Lloyd's collapsed. Founded in 1855, Cotesworth was forced to place its marine syndicate 535 and non-marine syndicate 1688 into run-off.

In March, its parent company HIH Australia went into provisional liquidation and Cotesworth failed to find another financial backer.

Head of regulation at Lloyd's, David Gittings said: "It is regrettable that syndicates of that pedigree have gone into run-off."