There is still confusion about the likely effects of the Y2K bug, even in insurance circles. So is the industry confident that it will cope? Christopher McKevitt reports.

So where is it not safe to be at the stroke of midnight as the new millennium arrives? Much depends on who you talk to. The ghouls amongst us will be expecting to find the maternity ward with its incubators on the blink or will be busy searching the skies for plummeting aircraft.

Then there are those who tell you the only danger in flying over the New Year will be the occasional outbreak of air rage amongst the jet-setters determined to track daybreak across the globe.

In between is a vast arena of quiet calm. The IT people have been in. They were expensive but they've done the job. We've done dress rehearsals. And if anything does go wrong, we have a contingency plan. More tellingly, the press has failed to find a single major example of pending Y2K catastrophe. We're as confident as we possibly can be. Or are we?

Last week the news from New York was not good. A leading firm of actuaries warned the global insurance industry that exclusion clauses would not be enough to fend off billion dollar Y2K claims.

New York actuaries Milliman & Robertson predict the adequacy of exclusion clauses will undoubtedly be tested in the courts as desperate business leaders look to defray the costs of their companies' collapses. Directors and officers insurers are likely to be severely tested as company shareholders look to sue for loss of stock market value.

"It is inconceivable that all parties will simply absorb these losses without at least attempting to collect some portion from their insurance policies," says Raja Bhagavatula of Milliman & Robertson.

The firm's Y2K analysis is stark and comes with a $35 billion (£22bn) price tag. It predicts that the US insurance industry will face up to $8bn (£5bn) worth of payments for general liabilities, including car accidents, property damage and personal injury.

But that will pale into insignificance beside the bill insurers face for corporate problems. Bhagavatula says that one per cent of all nine million US firms will fail as a direct result of Y2K problems and 15% of government departments and businesses will experience at least one crucial systems failure, causing losses of $30bn (£19bn). The legal costs to insurers arguing the toss with clients about where liability falls could be in the region of $10bn (£6.4bn) and take most of the first decade of the new millennium to resolve.

Asked if UK insurers were confident about the Y2K issue, ABI manager of electronic commerce John Kemble says: "In the main. I don't think you can guarantee anything about 2000, but from very early on they've been confident. They've had plans in place and they've been working through projects.

"No one's volunteered that they've had any trouble and I wouldn't expect them to have had any. All the efforts have been towards trading partners and ensuring they are on the ball."

Customer research by Axa suggests that more than 50% of people think the millennium bug will have no impact on them. Of the rest, 60% could imagine themselves making a claim.

Spokesman David Ross says the company's call centres are anticipating calls about domestic electrical goods not working, the sort of problem not covered under insurance in any case. "I'm in no doubt that we'll get calls about the video but there's no suggestion that we'll be meeting these people's claims," Ross says.

Axa's approach to opening over New Year speaks volumes about the sort of contingency arrangements insurers are putting in place.

Company premises, scheduled to open over New Year, have been equipped with their own generators in case of power failure. Each is capable of supplying 14 days of electricity. Under health and safety law, a premises can't open without a supply of fresh water for staff, so Axa has ordered in crateloads of bottled water in case the tap supply fails. The insurer also took the opportunity to replace 3,500 PCs deemed not worth upgrading.

Out in the wider world, insurers say that rural areas are more likely to be affected than urban areas where critical services such as hospitals are located. "If they have to shed power, then it will be the smaller towns that will be hit," said Axa business continuity planner Shirley Alexander at a seminar earlier this year.

Elsewhere, the majority of Lloyd's syndicates have admitted that the measures they put in place to avoid Y2K exposures may not be enough. A total of 11 syndicates, including Hiscox and Jansen Green, say they definitely expect to pay out, according to the 1999 Lloyd's rating guide of syndicates.

"A big catastrophe is easier to cope with because it is one single event," says Andreas Graham, an underwriter with Hiscox. "What we're most worried about is thousands of events that would trigger most policies. That would be the Armageddon scenario. If you give

$1 million dollars of cover on 2,000 policies then you've got £2bn worth of exposure."

However, Reg Brown, chairman of the Market Year 2000 Central Information Programme, established to provide information and co-ordinate activites for the London market in relation to Y2K issues, believes that if anything does happen it will not be as bad as scaremongers have been saying. "Our syndicate [RE Brown] has only had two notifications of circumstances that could give rise to Y2K claims," he says. "Both involved IT companies concerned about old software still in use by clients. Both are more than 18 months old."

Risk management expert Carol Edrich of the London-based Kai Corporation, which provides Y2K date change consultancy services, says it's a statistical certainty that there will be Y2K-related events but finding out about them will be another thing.

"There will be one fatal event in 10,000 of everything, even if it's just stepping into a puddle," she says. "One thing I can guarantee is that we'll never know the true extent of Y2K problems. If they say it's a Y2K problem, we won't know if it was a real one. It could be expedient to blame something on Y2K rather than on management incompetence."

Two tell-tale signs that a company may have had or be having Y2K difficulties will be a massive expenditure in the annual accounts at the start of the year and merger and acquisitions activity, she says. But for most of us, 2000 will be routine. "I think it's highly unlikely that planes will fall out of the sky," Edrich says. "But I think it's highly likely that luggage will get lost."

And for those who have done nothing about Y2K? If you want to be absolutely sure you are insulated from Y2K, Edrich says, then you should start printing off hard copies of everything held on PC.

Are brokers prepared?
Twenty months ago, the ABI wrote to a number of brokers and intermediaries urging them to think about their state of readiness for the big four-digit date change.

Brokers were asked to self-assess their systems and put themselves on a scale of one to five in terms of their preparedness. "Scale five was: 'Problem? what problem?'; scale one was: 'We're ready and able'," explains ABI manager of electronic commerce John Kemble.

The thinking was that brokers who were not prepared would pull themselves up the rankings with the help of the checklist. A total of 3,997 signed up and, by the end of last week, 2,398 were signed off as fully ready. "There are 71 who are still on scale five but I predict they are already out of business or they've not heard of the problem – but it's not much of a percentage is it?" says Kemble.

He adds: "They're probably one guy and a dog and a 10-year old PC – or probably no PC at all. We had guys when we started this off ringing us up saying: 'I don't have a PC; do I need to fill this form in?'"