Does Your Computer Need Millennium Coverage?
It was bound to happen. Growing anxiety over the year 2000 computer bug has spurred insurance companies and brokers to try to capitalize on what could be a potentially large and lucrative market: millennium insurance.
The draw? Costly business disruptions and lawsuits may occur despite the $300 billion to $600 billion that Gartner Group Inc., a technology research firm, estimates is being spent worldwide to reprogram computers to read 2000. Those disruptions and ensuing litigation could cost $1 trillion, figuring average legal costs and a 5% failure rate, says Steven L. Hock, managing partner for operations at the San Francisco law firm Thelen, Marrin, Johnson & Bridges.
Several insurers and brokers have already unveiled their plans--and some of them cost a pretty penny. American International Group Inc., with Minet Inc., a broker owned by St. Paul Cos., expects to write its first policy in six weeks. For $100 million of coverage--the initial amount available--the insured would pay $60 million to $80 million to AIG. If losses are higher than what the insured has paid in, AIG will pay the difference. If losses are lower or nonexistent, AIG will return all but 10% to 15% of the total premium paid. "It looks attractive, but I haven't made any decision," says Christer Magnusson, head of risk management at Sweden Post Group, which runs a giant banking system and delivers the mail in Sweden.
Insurance broker Marsh & McLennan Inc. is offering a more typical and cheaper insurance plan in which the likely premium paid would be up to $5 million for up to $200 million of coverage, says William A. Malloy, a managing director at the broker. Possible underwriters include Zurich-American, Lloyd's of London, and Reliance National. "Potentially there will be hundreds of millions of dollars of premium involved," says Mark L. Owens, executive vice-president at Reliance National Insurance Co. Eric M. Kamen, a managing director at Morgan Stanley & Co., has studied the policy. "The product has enough appeal that we are going to follow up and meet with them."
Despite the high risk of underwriting, other insurers are sure to jump into the 2000 arena. Marr T. Haack, vice-president of the technology market group at usf&g Insurance, says the company is likely to offer a specific millennium product or enhancements to existing coverage.
With existing policies not covering losses entirely or at all, special insurance may be a welcome salve even for companies that have done a good job retooling their systems. "We'd definitely consider it. We are going through the assessment process, but it's got to make sense from a cost-benefit point of view," says Jim Devlin, director of Citicorp's year 2000 Enterprise program. Citi hasn't yet studied any specific insurance plan, but has its legal and risk management departments evaluating the issue.
Many companies--and even some insurance companies--will forgo insurance, fix their systems, and take their chances. Says Reliance's Owens: "We'd be inclined to self-insure, although we haven't finalized the decision." But as the 21st century approaches, more and more firms may decide it's better to share the risk with insurance companies.