Energy insurers assess Year 2000

As the energy industry prepares for the Year 2000 date-change problem, insurers still have not decided how to provide cover. Information technology departments are rewriting old software and upgrading control systems containing embedded chips so the year change from 1999 to 2000 does not bring chaos (OGJ, Aug. 4, 1997, p. 31). Tim Mathieson, chief underwriting officer in the global energy unit of Zurich Insurance Co., London, says that, by the end of June, his company plans to have a proposal

May 18, 1998

3 min read

David Knott
London
[email protected]

As the energy industry prepares for the Year 2000 date-change problem, insurers still have not decided how to provide cover.

Information technology departments are rewriting old software and upgrading control systems containing embedded chips so the year change from 1999 to 2000 does not bring chaos (OGJ, Aug. 4, 1997, p. 31).

Tim Mathieson, chief underwriting officer in the global energy unit of Zurich Insurance Co., London, says that, by the end of June, his company plans to have a proposal for industry about Year 2000 cover.

Mathieson says the Year 2000 could be catastrophic for petroleum companies. For example, 10-15% of embedded chips have a date function and could be affected. A typical North Sea platform houses 40,000 embedded chips.

"Companies should by now have assessed the potential for damage and be beginning to test," said Mathieson. "We are talking to our customers about how to address the Year 2000 issue.

"The energy industry-and particularly large companies-has already done a huge amount of work. Some companies are less prepared, while others have not even begun to consider the problem."

Preparations

Energy industry insurance policies come up for renewal each year, so the insurance industry is preparing for the year when problems will arise.

"We don't want to walk away from our customers when they are facing a major risk," said Mathieson, "but we need to assess what the risk is. We have to judge where each of our customers stands regarding Year 2000."

Insurance companies cover themselves against their customers' risks by taking further cover in the reinsurance market. Reinsurance policies are renewable on Jan. 1 each year.

One concern for big insurers like Zurich, said Mathieson, is that, in late 1999, the reinsurance industry could take fright: "They could remove themselves from the risk at a late stage, leaving us holding the baby.

"We need to work as an industry to formulate a proposal that will persuade reinsurers to cover us. We would like more market certainty and would welcome an industry-wide approach, but we are not sure one will be forthcoming."

Insurers' dilemma

If the reinsurance sector refused to cover insurance companies for Year 2000 policies, Mathieson says insurers would follow suit.

"This would be a terrible indictment of the whole insurance industry," said Mathieson, "so we are keen to come up with a sound assessment of the risk to sell to our reinsurers."

The problem with Year 2000 risk assessment is that the insurance industry traditionally calculates risk, in part, on the basis of experience. There is no experience of a problem like Year 2000.

"The insurance industry will have to stick its neck out and take a view on the risk," said Mathieson, "and we will need to underwrite this risk very carefully."

Mathieson anticipates few problems assessing the risk for companies that are preparing thoroughly. The problem for insurers will be assessing companies that are not as prepared as they claim.

"Some less-prepared companies may hide behind the general industry position," said Mathieson. "We have to identify them. Yet, even for these companies, Year 2000 should be insurable-at a premium."