August 12, 1998

 

Y2K and the Insurance Industry

 

It's out there if you have deep enough pockets. Y2K insurance is available from at least two underwriters. But high premiums and other issues appear to be keeping most companies away.

 

"Premiums are very expensive and the coverage is somewhat limited," says Andrew Pegalis, president of Next Millennium Consulting, an independent Y2K risk management consulting firm. "But more importantly, there is a fundamental flaw in the approach of those offering Y2K insurance."

 

Y2K insurance providers are both selling their product and providing some Y2K remediation, says Pegalis. This is a big problem. "When a business is spending a lot of money tied up in remediation, it looks to the vendor's errors and omissions insurance, and the burden is on the vendor," he says. "Buying Y2K insurance and getting your remediation thrown in puts the burden on the user."

 

Year 2000 insurance seems a poor investment to many cash-strapped companies who see a greater ROI in the equities market, he says. "They think their money is better spent on investments rather than buying insurance since Y2K remediation has tied up a lot of their money."

 

Just because no one is biting at Y2K insurance offers now doesn't mean it won't happen. And if it does, the insurance industry may suffer. "The impact of the year 2000 crisis on the insurance industry could be more significant than any insurers have seen," says Pegalis. "It could be more devastating to the industry and the national economy than the Savings and Loan crisis was to the industry in the 1980s."

 

Right now, 99 percent of American businesses can't afford the Y2K insurance on the market, says Pegalis. To make Year 2000 insurance more palatable, he recommends a comprehensive insurance program with a less costly price tag.

 

"Insurance policies can be developed to deal effectively with Y2K losses," he says. "Companies that have taken great strides to achieve Year 2000 compliance should be entitled to purchase insurance."

 

In the mean time, says Pegalis, keep up with due diligence. Make sure your Y2K project encompasses all major areas of business: internal systems, embedded systems, external business dependencies, electronic trading partners, disclosure, liability insurance and contingency planning.

 

 

 

•All project areas should be worked on at the same time.

 

 

•Year 2000 inquiries are flooding corporate America, but you must stay on top of it and join in creating your own paper trail.

 

 

•Send verification letters via postal mail: E-mail may save money, but it's unsettled as to whether it is a "real" paper trail.

 

 

 

Pegalis sees a bright future for affordable, comprehensive coverage. "It's an unprecedented soft market," he says. "Insurance companies are fighting for accounts, and it's not in the underwriter's best interest to exempt Y2K if it means losing an account."

 

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