By Dennis Pillsbury
There are atrabilious prognosticators who predict the end of the world when the Millennium starts on January 1, 2001. Fire and brimstone will wipe out the world's population. However, one year earlier there will be a disaster of nearly equal proportions, at least in the brains of many of the world's computers--millions of people will cease to exist.
The problem started in the electronic dark ages when, as Phil Gendaszek, center director for PLP in Howell, New Jersey, explains, "space within the machine and storage medium was at a premium. At that time (the '60s) carrying the '19' was a waste of space. The belief was that the applications would not be around by the time the year 2000 rolled around. Unfortunately, that did not happen. Many of the applications are still sitting there with no century in the systems." PLP provides information technology resources to the insurance industry, including Year 2000 compliance services.
For property/casualty insurers, Gendaszek continues, a host of problems will occur if they don't take action to correct the problem. For example, in the case of auto insurance where age is one of the factors used in calculating rates, the age will be a negative as far as the computer is concerned because year "00" will be read as the year 1900 by the computer.
Another problem that could occur comes about when increases or decreases in rates are calculated. The computer looks for the closest year's rates when putting through increases or decreases. When the year hits "00," the closest year will be the year in which the policy was issued and some people could be enjoying some really nice rate decreases, at least until the mistake is recognized.
Gendaszek points out that "going into the programs and making the changes necessary will be time consuming, but is a task that does not take a senior programmer. Where a company can run into a problem is testing the applications to make sure the changes did not inadvertently mess up something else. It's really pretty easy to add something, but that could affect something that is currently working." Testing and auditing will be key in making certain that the problem really is solved. He also warns that upgrading software will help but it is not a "quick fix." Files that are imported into the new system still will have to be brought into compliance.
He continues that the problem also could affect some hardware as well as software. Timers that are built into elevators, bank vaults, security systems and other electronic devices all could have problems when the date clicks over to "00," Gendaszek notes.
"This is not a problem that can be fixed in December of 1999," he warns. "Many renewals for policies expiring in the year 2000 will occur late in 1998." He adds that some companies already have seen some problems with five-year bonds.
"Pretty soon," he says, "this is going to start to get expensive. It's a problem that hits the bottom line in two key areas--it increases expenses and decreases an insurance company's ability to compete."
While the "Millennium Bug Crisis" is creating problems for many in the insurance industry, it also is being viewed as an opportunity. The liability problems could be enormous for companies whose solutions to the problem don't prove as efficacious as hoped.
In response, Marsh & McLennan has developed business insurance coverage that will provide up to $200 million in coverage to companies facing potentially disastrous legal and financial exposures from the crisis. Marsh & Mac points out that companies could face countless lawsuits if these failures lead to problems such as cancellation of policies or other contracts, mortgage foreclosures, rescission of credit cards, etc.
"Companies realize the daunting complexity and mammoth scope of the technical issues of making their computers ready for the year 2000," William Malloy, a managing director of Marsh & Mac, said. "But they also need to act immediately to address the liability issues beyond technology which are raised by the Millennium Crisis. They must become proactive and understand their specific exposures to determine how to protect themselves."
Walter Tomenson, executive vice president of Marsh & McLennan, provides some examples of such exposures. A shareholder lawsuit could potentially name as defendants the corporation, directors, officers, vendors, software auditors, accounting auditors, consultants and investment bankers. Directors and officers could be charged with negligence for not identifying the problem and taking proper action. Professional service organizations could be named for not demanding Y2K-compliant products and/or not recommending that a corporation initiate a Y2K Action Plan. Also, accounting auditors could be faulted for placing their seal of approval on a company's published financial results and not disclosing or footnoting that the firm has a large contingent liability related to the Millennium Bug Crisis. Further, considering industry consolidations over the past five years, investment bankers could be cited for overlooking Millennium Bug issues.
The new risk-transfer coverage has been developed in consultation with Zurich-American Insurance Co. and other underwriters, including Lloyd's of London and Reliance National on a syndicated basis. Basically, it will provide protection for liabilities to third parties if a company's computer system fails to adequately address the Year 2000 changeover and directly or indirectly causes losses to an outsider. It will also provide protection against a company's own loss of profits or extra expenses related to inadequate updating and/or replacement of its computer system for ineffective operation in the year 2000. In addition, the insurance will cover lost profits and expenses which arise from data supplied by an outside computer system.
Besides the risk-transfer product developed by Marsh & McLennan, American International Group has developed an alternative approach to the problem which Marsh & Mac said it also would utilize to complement its offerings and provide clients with a range of alternatives.
The new coverages will need to be customized since no two corporations have quite the same computer exposures. Before issuing coverage, the insurers will use expert consultants to evaluate each company's action plan for the year 2000, which should include a number of computer-readiness factors, such as:
--the use of outside experts to verify or correct system mistakes;
--a timetable to implement the Year 2000 project;
--an inventory of all hardware and software used by the company;
--information on the compliance plans of suppliers and customers with whom data is exchanged electronically;
--determination of the potential liability exposures and how the company plans to respond;
--contingency plans and management commitment to rectify the problem.
In 1997, the technological aspects of this issue will be at the top of most, if not all, corporate agendas. It will represent a time-consuming, labor-intensive process for computer programmers and other informational technology and electronic data processing experts in the period ahead. Correction costs have been approximated at $1 to $2 per line of programming. This can present serious timing and budgeting problems when, for example, a major international firm has 40 million lines of programming in their systems. On a worldwide basis, the costs to fix this problem have been estimated to run as high as $300 to $600 billion, Marsh & McLennan says.
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