<a name="4"> Year 2000 Computer Date Problem - Insurance and Insured <a name="5"> Financial Times, UK

Wednesday July 16, 2023

By Ralph Atkins

Insurance: A risky business

The mid-size German insurance company was shocked. It wanted to insure a car beyond 2000, but the group's computers insisted it was not possible: the new vehicle was being treated by the software as a vintage car.

The anecdote provided an early warning of the approaching millennium bomb - the widespread chaos expected from computers which, because they use only the last two digits of a year, regard dates beyond 1999 as referring to the 1900s.

But the "vintage" car example almost certainly understated the impact on the insurance industry.

A recent investigation by Cologne Re - the oldest of the world's reinsurance companies, which specialise in "insuring the insurers" - has confirmed not only that failure to address the millennium bomb problem could lead to massive but incalculable financial losses, but also that much of the burden would fall on insurers and reinsurers.

If insurers are to protect themselves, they may well increase policy rates - or withdraw cover altogether - from companies that fail to take protective action. Alexander Quack-Grobecker, general manager responsible for third-party liability business at Cologne Re, says: "A lot of money is at stake."

Cologne Re is not among the more apocalyptic forecasters. It plays down fears that computer errors could cause aircraft crashes. But the group's survey of 124 German banking, engineering and chemical companies revealed that 60 per cent had not studied fully the possible problems, and of these a third had not taken any preventive steps.

A quick calculation, based on the responses, suggested the bill for damage incurred by just the 124 companies surveyed could be as much as DM900m (£300m). "At least it gives you a hint about the size of the problem," says Quack-Grobecker.

Insurers would pick up the bill not just because they have provided policies to computer companies that would pay out when services or products proved faulty, warns Cologne Re. Insurers also cover auditors and consultants against damages claims. Moreover, standard public and product liability insurance policies, bought across industry, could trigger claims when products or services fail.

Insurers faced with such a bill could in turn seek redress from the computer manufacturers. But they would risk creating an insurance "spiral" because the computer manufacturer would claim on its insurance policy that might well have been underwritten by the same insurer or reinsurer.

Discussions in continental Europe about the implications of the millennium bomb may have lagged a little behind the US or UK. But Quack-Grobecker believes that by this time next year it should be clearer which companies will have begun sufficient preventive action.

On the insurance buyers' side is the current soft market in insurance that has led to price falls in recent years.

"But there will be situations where insurance companies, as awareness develops, become more inclined to increase premiums and maybe, in some cases, just to say 'goodbye' to the business because the premiums don't match the risk," he says.

Insurers in Germany and elsewhere in continental Europe would have difficulty excluding millennium risks from the policies of those already covered. The tradition of long-term contracts makes it difficult to change terms without cancelling a policy.

In the US, the signs are that the widespread debarring of ill-prepared companies is not being seriously contemplated.

But in the UK, says Quack-Grobecker, "there is intense discussion about exclusions right now".

© Copyright The Financial Times Ltd 1997

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