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MONTE CARLO, Monaco -- The reinsurance industry is keenly aware of the Year 2000 risk but generally is counting on ceding companies to manage the exposure.

For those insurers that can't demonstrate that they are responsibly underwriting the exposure, reinsurers may walk away from the risk, some reinsurance executives say.

Even though many questions remain over how the Year 2000 problem will play out and what policies could be triggered, reinsurers are preparing for losses to be significant.

For the most part, there is uncertainty about what the Year 2000 will bring, said Dirk Lohmann, chief executive officer of Zurich Insurance Co.'s reinsurance operations. However, he added, "the general consensus is that even for those doing all they can to mitigate the exposure, there will be losses."

Some insurers and reinsurers are taking the position that the Year 2000 bug is not a covered event, or a fortuitous loss, though they may cover such losses as fire after a computer failure, he said.

Year 2000 losses will have an effect on loss ratios, for which no premium was paid, Mr. Lohmann said.

"If it's not paid now, it will be paid later. The cost will work its way through the system, and there will be higher costs," he said.

Reinsurers can't put a blanket exclusion on all Year 2000 exposures, said James P. Bryce, senior vp at International Property Catastrophe Reinsurance Ltd. in Bermuda.

"It's easy to say 'exclude everything,' but then you would sit back and you wouldn't have any business," he said.

Instead, reinsurers need to examine the issue on a case-by-case basis, as each risk will likely have different exposures, Mr. Bryce said. For example, risks in the Northern Hemisphere would include burst pipes, whereas in the Southern Hemisphere concerns would more likely center on issues such as food spoilage due to the failure of air conditioning systems, he said.

"You have to work through the problems with the clients and make sure that you have a high comfort level," Mr. Bryce said.

Year 2000 losses could first manifest themselves in the directors and officers liability market, said Brian M. O'Hara, chairman and CEO of X.L. Insurance Co. Ltd. in Hamilton, Bermuda. He predicted a mountain of litigation against corporate executives as a result of Year 2000-related losses.

"We see opportunity in Y2K risks because we aren't exposed," Mr. O'Hara said. X.L. lost a lot of D&O liability accounts to recent competition and also has higher attachment points for D&O, so it isn't as exposed to the problem as other companies underwriting D&O risks, he noted.

The key issue for many reinsurers is how clients are dealing with the Year 2000 exposure.

"Y2K may be a concern in instances where clients don't seem concerned about addressing exposures to systems," said William J. Adamson, CEO of CNA Re in Chicago. The reinsurer also is talking with cedents about their plans for covering Year 2000 risks and how they'll manage that exposure, he said.

Overall, he said, there is more concern about potential problems with non-U.S. risks.

Hans D. Rohlf, managing director and chief underwriting officer-North America for Hannover Reinsurance A.G. of Hannover, Germany, said, "Year 2000 is certainly a topic of discussion among reinsurers, but our U.S. counterparts take the exposure more seriously than some European reinsurers, not excluding my fellow countrymen."

Many ceding companies are managing this exposure by differentiating between risks, in some cases walking away from accounts that haven't done enough to minimize their exposure, Mr. Rohlf noted.

But reinsurers can't leave risk management entirely up to the cedent, he added.

"As much as we expect our cedents to underwrite their business, we have to underwrite our book and differentiate also," he said.

The Year 2000 problem is largely an issue for insurers to deal with rather than reinsurers, said Norbert Stohschen, chairman of Gerling-Konzern Globale Reinsurance Co. in Cologne, Germany.

However, reinsurers must ensure that insurers are addressing the problem, he said.

"If they are not, then we will cancel the contract," he said.

But many property reinsurers in Germany already are exposed to potential losses due to the prevalence of three-year coverage contracts, Mr. Stohschen said.

"I'm sure it will have a big impact on the profitability of our business," he said.

Companies with U.S. exposures are more likely to take a greater interest in Year 2000 problems, as they will likely face the largest liabilities, said Jacques Blondeau, chairman of SCOR S.A.

"U.S. lawyers are already at the starting blocks," he said.

SCOR has already acted to reduce its exposure to Year 2000 liabilities by leaving programs with heavy professional liability exposures, especially those programs covering computer manufacturers, Mr. Blondeau said.

Reinsurers and insurers that offer occurrence-based coverage will not be able to do much about the problem, he said.

"The exposure is already there," he said.

While Year 2000 exposures are often regarded as a liability problem, there is also a significant property exposure if a failure to fix a system results in property damage to the items the system controls, said Herve Cachin, chairman and general manager of Societe Anonyme Francaise de Reassurances, a unit of Partner Re Ltd. in Paris.

SAFR is asking its cedents to review their books of business and ensure that all the policyholders have a plan to deal with the Year 2000 problem, he said.

"If they do so, we tell them that we are ready to cover the residual risk. . . .If we are not sure that they have done this, we will put in an exclusion," he said.

"I am concerned about the impact the Year 2000 problem could have on the market," said Azmin Daya, managing director of New Cap Reinsurance Corp. Ltd. in Sydney, Australia. "That is one reason not to be too aggressive this renewal season," he added.

The Year 2000 exposure is also driving interest in multiyear programs, noted Mr. Lohmann of Zurich Re. He said he sees more such deals in both insurance and reinsurance. "The goal is to get (through) the Year 2000, as well as lock in top-line growth," he explained.

So far, there has been little consistency in the Year 2000 stance taken by reinsurers, said Ronald A. Iles, London-based chairman of Chicago-based Aon Re Worldwide.

For example, some reinsurers are giving fairly broad property coverage, while others say they will cover the consequential damages but not the initial damage, he said.

"It is very difficult to get a collective view on the market," he said.

The divergent approaches being taken by reinsurers to the problem could lead to confusion and problems, said Benito Pagnanelli, deputy general manager at Assicurazioni Generali S.p.A. in Trieste, Italy.

"It will be unacceptable to have on the same reinsurance treaty 10 different reinsurers, each with different opinions (regarding coverage)," he said.