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Global reinsurers are adopting a pragmatic approach to contract renewals when it comes to risks exposed to the Year 2000 problem.
While many reinsurance companies are hesitant to discuss their approach to the problem before notifying cedents of their views during the next renewal round, the common ground is turning out to be assessing each case on its merits.
This generally involves reinsurers trying to determine if ceding insurers have done their jobs of evaluating possible Year 2000 exposures and have either priced the primary policies accordingly or issued exclusions against related losses.
The Year 2000 problem stems from a former computer programming shortcut, in which two digits were used to denote the year. It is feared that unless computers are reprogrammed, which entails poring over thousands of lines of code, or replaced, many will read the year 2000 as the year 1900. If that happens, the systems they govern might crash or return erroneous data on Jan. 1, 2000.
Over the past few months, a number of leading reinsurers have been carrying out studies and determining how they will deal with the problem in the next round of renewals. Policies written at that time are most likely to feel the impact of any Year 2000 claims.
Munich Reinsurance Co., the world's largest reinsurer, is one such company. Claus Biebrach, a deputy member of its management team responsible for coordinating Year 2000 policy, said the reinsurer is preparing a strategy statement now that will be communicated to cedents before renewals in September.
Mr. Biebrach said Munich Re is "very concerned with the risk in all classes of business -- property, liability, marine and credit," and it hopes to work with its ceding company clients to solve those problems. However, he declined to comment on the contents of the statement before it is made available to cedents.
Another major German reinsurer, Hannover Reinsurance Group, said that though it continuously monitors insured exposures to the Year 2000 problem, its board of directors has developed an underwriting strategy for circulation throughout the group.
Under its reinsurance contracts, Hannover Re will cover bodily injury and property damage, including consequential loss, arising from all "normally covered perils," even if such losses result, in whole or in part, from the failure of hardware or software insufficiently prepared to deal with the Year 2000 problem.
However, economic losses are another matter. Hannover Re will decide on a case-by-case basis whether it will reinsure financial losses arising from neglected or insufficient preparation of hardware or software to recognize, process or store calendar dates. An important criterion in this respect will be how a cedent handles such risks. Hannover Re said it may insist that measures be implemented to reduce the exposure.
France's largest reinsurer, Paris-based SCOR, has adopted a very similar policy. Jean Alisse, SCOR general counsel in charge of supervising group policy on Year 2000, said SCOR also has prepared a reference chart for its directors in preparation for the next renewal season. He expected the chart to be issued before the end of this month.
SCOR's chart will have four categories of risk, with category one representing risks with almost no Year 2000 exposure and category four representing those with the highest exposure.
Once SCOR has categorized risks, it will deal with each request for reinsurance coverage on a case-by-case basis. In this respect, its approach is similar to that of Hannover Re, with the decision to reinsure depending largely on the risk management actions of the primary insurer and whether it is deemed to have properly assessed the risk.
"Then we will probably use this chart with the behavior of each cedent. If the cedent does nothing, we would ask whether we should continue to work with that cedent. If the cedent is very concerned and has carried out a lot of inquiries, we will discuss with it where is the potential risk for them and for us," Mr. Alisse explained.
While SCOR would cover category one and two risks, he said SCOR is unlikely to reinsure most category four risks without exclusions. Mr. Alisse said it is category three risks that are likely to be the most difficult for the reinsurer to decide on, because the risk, though high, will not be considered as great as in the fourth category.
Mr. Alisse maintained that SCOR's charting procedure certainly will result in some classes of risk being excluded for reinsurance protection. He said one possible candidate for exclusion is directors and officers liability coverage.
In contrast to the Assn. of British Insurers, which has drawn up Year 2000 sample exclusion clauses for those members who choose to use them, the London Insurance & Reinsurance Market Assn. has avoided any actions that appear to advocate either covering or not covering Year 2000-related risks.
Instead, in December 1997 LIRMA set up a Year 2000 subcommittee of its Technical and Underwriting Standing Committee to look at the underwriting and claims issues linked to the millennium date change.
David Watson, director and chief underwriter of London-based NAC Reinsurance International Ltd., heads the subcommittee. He emphasized that LIRMA had specifically avoided introducing more exclusions, particularly as many of its members also belong to the ABI, which offers its own exclusionary clauses.
"We tried to tackle other areas, such as awareness (of the risk) and quality underwriting information. And to be fair, if the industry was going to go down the exclusionary route, then a lot of this would not be an issue," he said.
Earlier this month, the work of the subcommittee culminated in the issuing of a LIRMA Y2K Index on CD-ROM for insurers and reinsurers to use as a benchmark for assessing Year 2000 exposures. The index provides underwriters with relative risk factors based on industry sectors and geographic location. It is meant to supplement underwriters' own individual assessments of particular risks by providing standards for exposures on industrywide and countrywide bases.
By indicating how a particular industry and a particular country are moving toward compliance, the index gives an underwriter a better feel for a particular exposure in comparison with similar exposures elsewhere, Mr. Watson explained.
The index, developed with Gartner Group, a Stamford, Conn.-based information technology consulting firm, has been updated quarterly over the past 12 months while it was in preparation, building up a picture as to how certain industry sectors in certain countries are moving toward eliminating their exposure to Year 2000 problems, Mr. Watson said.
Continued quarterly updates are planned throughout the year 2000 and possibly beyond.
In a booklet, "Business Risk Year 2000-Best Practice Guidelines," LIRMA cautions against believing that excluding Year 2000 exposures will be a panacea for reinsurers. The guidelines state that issuing exclusions cannot be guaranteed to be effective, may be used inappropriately or indiscriminately, and will lead to litigation over the validity of the exclusionary language.
On a personal level, Mr. Watson said he believes it unlikely that any reinsurer would totally exclude Year 2000 coverage. "I don't believe any reinsurer would choose to do that, but certainly they would expect a very well-thought-out strategy as to how their clients are addressing their Year 2000 exposures and controlling them," he said.
He echoed others in the sector in maintaining that, in general terms, reinsurers are seeking to work closely with cedents and to support them where they can. However, Mr. Watson said, there are certain areas where reinsurers might want to see primary insurers reviewing policy terms and, in certain cases, restricting coverage. Such areas include industrial all-risk policies, where property coverage should be restricted to named or defined perils; and on the casualty side, in policies covering such risks as product recall, and financial guarantees or losses.
While Lloyd's of London is leaving it up to individual syndicates to decide how they will deal with Year 2000 coverage, it does have a working party of underwriters trying to develop a common approach syndicates could choose to adopt.
David Clarke, managing director of Lloyd's Non-Marine Assn. Ltd., said the Lloyd's Claims Steering Committee is working with a panel of lawyers to try to formulate a common approach for the market to follow. Mr. Clarke expects to have a standard ready before the next reinsurance renewal period.
"As this is a completely new animal, no one knows what form claims will take," said Mr. Clarke said of the millennium problem.
The NMA has devised model "clarification" clauses and has briefed some syndicates on Year 2000 issues. A spokesman emphasized, however, that the NMA's purpose "has not been to tell them what they should do, but to inform them, giving as much information as possible so they can make whatever decision they want."
U.S. reinsurers are among the most reticent about commenting on their approach to Year 2000. They, too, are looking to primary insurers to set out clearly in their policies how they will treat the matter.
The strategy of Employers Reinsurance Corp. of Overland Park, Kan., is typical of the sector. A company spokesman said, "We are handling the matter carefully and underwriting the accounts individually."
Swiss Re America said its parent, Swiss Reinsurance Co. of Zurich, Switzerland, is formulating an official Year 2000 response and that it is unable to comment until the response is in place.
Similarly, a spokesman for Chicago-based CNA Reinsurance said it "is working to determine our final position." The spokesman said the company hopes to be ready to report that position to agents and customers by late August or early September.