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AUDITS HELP SPOT YEAR 2000 EXPOSURES

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CALGARY, Alberta -- Insurers and policyholders can gauge their susceptibility to the millennium bug by using extensive Year 2000 audits.

The assessments provide insurers with valuable information to help them control their exposures, and they provide policyholders with a check system for their Year 2000 compliance projects, an insurance executive said.

As for all insurers, Year 2000 exposures are an unfamiliar problem for Oslo, Norway-based Storebrand Skadeforsikring A/S, said David R. Cooper, vp and senior underwriter.

Most underwriters base their judgments on historical data, but the Year 2000 liability is new and unknown, Mr. Cooper said at a session of the Canadian Risk & Insurance Management Society annual conference earlier this month.

To help Storebrand assess its exposure to the Year 2000 problem, the insurance company hired KPMG Peat Marwick to conduct an in-depth assessment of six of Storebrand's energy industry policyholders.

"We wanted to get to know what the problems were and how they were being tackled," Mr. Cooper said.

The pilot project provided valuable information on the Year 2000 problem, and it let Storebrand amend the assessment to make it more effective in the future, he said.

Although Storebrand's assessment was used for the energy industry, it can easily be adapted for other industries, Mr. Cooper said.

The assessment should begin with collecting documentation and completing an extensive questionnaire on what policyholders are doing to address the Year 2000 problem.

Documentation should include: details on the policyholder's computer programs; organization charts of both the company structure and its Year 2000 management team; the most recent annual report; the policyholder's Year 2000 policy and strategic plan; documents on any conversion process for the systems; lists of key suppliers; and information on what contingency plans have been put in place.

The insurer or the consultant it employs should next interview the policyholder's senior managers and work through the questionnaire with them in person, Mr. Cooper said.

Then an assessment can be made of the different elements of the policyholder's Year 2000 project.

The main elements that should be considered are: the infrastructure of the organization and the availability of information on the Year 2000 problem; the management of the computer system; the progress of the investigation into the problem; modifications that have been made to systems; details on any testing conducted on the systems; other aspects of the implementation of remedies; customers' and suppliers' responses to the questionnaire; and the overall state of the policyholder's facilities and equipment.

Each element has a number of answers, and each answer is scored. Each element is then weighted according to its importance, and a final score is obtained, which can be used to judge the unit against other units in the company or to judge the whole company against its peers, Mr. Cooper said.

One of the main advantages of this exercise is that the assessment establishes communication on the problem between the insurer and policyholder and with the various units of the policyholder, he said.

"You establish good relations and good communications between the group's Year 2000 project managers and the operational units," Mr. Cooper said.

As a result of the pilot project, Storebrand discovered several important issues and problems, he said. For example, most large oil companies have a huge number of computer chips to analyze in many hard-to-access places, but they generally they are on top of their Year 2000 problems, Mr. Cooper said.

The average North Sea platform has 10,000 embedded chips, so there are "more chips in the North Sea than fish," Mr. Cooper quipped. However, only 4% of those chips are date-sensitive, he added.

Smaller oil companies have gotten off to a slower start and would benefit from an extensive assessment, he said. Additionally, the exercise showed that, in units that were rapidly expanding, the Year 2000 problem was not given the priority that it was at other units under less pressure, he said.

"If a refinery is going from 100,000 barrels a day to 200,000, there is a lot of focus on the (production expansion) and not on the Year 2000 problem," Mr. Cooper said.

The session was moderated by Gary Hudon, assistant manager-risk management at Canadian Pacific Railway in Calgary.