Y2K RISKS ON SEVERAL FRONTSPosted On: Aug. 9, 1998 12:00 AM CST
The good news is that many insurers are on or ahead of schedule in their efforts to exterminate the millennium bug in their own computer systems.
The bad news, however, is that those efforts may remove only part of the problem for insurers.
Even if they clean up their own systems, insurers may suffer from problems caused by Year 2000-related computer glitches at third parties they deal with, particularly at sluggish government agencies, according to a report from Hartford, Conn.-based consultant Conning & Co.
Even if third-party problems are averted, however, insurers still face billions of dollars in claims as policyholders seek coverage under several types of insurance policies, the report warns.
Generally, insurers are doing a good job of fixing their own internal Year 2000 problems, according to the Conning report. Many large property and casualty insurers are close to becoming or are already Year 2000-compliant due to system upgrades made over the past several years, the report said.
However, insurers still may face Year 2000 problems from their extensive electronic links with other parties.
"Any company that communicates electronically with a non-compliant system risks data corruption and business disruptions in 2000 or before, and needs to contact these outside entities to ensure that they are Y2K compliant as well," the report says.
In particular, insurers could have problems when they communicate electronically with government agencies.
"Unfortunately, government efforts in a number of areas are behind schedule in achieving Y2K compliance," the report contends.
To minimize their exposure to these problems, insurers should work directly with all entities with which they are electronically linked, to try to overcome potential Year 2000 problems, according to the report.
Property and casualty insurers and reinsurers also may face significant liabilities as a result of Year 2000 losses of their policyholders (see Perspective, page 13).
"While the magnitude of this problem is uncertain, it is very real and potentially enormous in scope," the report says.
Insurers most likely will face claims on business interruption, directors and officers liability, errors and omissions, and general liability policies, according to the Conning report.
"Historically, property/casualty insurers have been a favorite target as society has sought to spread the economic cost of various problems," the report noted.
It is still too early to say what the potential liability for insurers could be, but "it is safe to say that the ultimate claims could easily surpass the losses of two recent catastrophes -- the Northridge earthquake and Hurricane Andrew," the report said. Insured losses from those two events totaled about $28 billion.
"Insurers and the Year 2000 Computer Bug: The Tower of Babel Revisited" is available from Conning & Co. for $550 by calling 860-520-1521.