Identifying the risks associated with the coming of the year 2000 has become a major preoccupation for insurers and reinsurers, explains Marie-Louise Rossi.

The so called "millennium bug" is not just an issue from 31 December 1999 onwards. It is causing problems here and now and will continue to do so long after the millennium celebrations are over.

While some underwriters see it as a business opportunity and have gone ahead and underwritten risks despite the losses which may be incurred as a result of the millennium date change, others have gone to great lengths to avoid liability. Wary of some of the extreme doomsday scenarios associated with the problem, they have chosen to try to exclude year 2000 (Y2K) exposure from all risks.

The London International Insurance and Reinsurance Market Association (LIRMA) is not in the business of telling its members what to do. Yet recognising the possible limitations of exclusion clauses - they work in the short term but may encounter legal problems in the long run or, indeed, may drive clients elsewhere - the association is launching a new tool in risk assessment to help underwriters make their decisions.

Our Y2K Index has just gone live in the 20 plus companies who formed the original group of subscribers. It is a product of extensive research, designed to evaluate the relative risk of a potential client succumbing to the Y2K problem. Gartner Consulting, part of international IT specialists Gartner Group, have devised and developed the model for us.

By looking at the factors such as the industry sector and country involved, the index assesses exposure on a scale of zero to 10. The lower the score the higher the risk. By using his computer model, the underwriter can get an instant guide to the likely extent of risk, caused by Y2K exposure.

Gartner Consulting has undertaken extensive international research for us into the various factors which play a part in Y2K exposure in order to give as full a picture as possible. These include:

* Country.

* Industrial sector.

* Awareness levels.

* Government and central bank action.

* Exposure to factors beyond the client's control.

The starting point for the index is the country of location. In principle, the more advanced the country in terms of technology and use of the microprocessor, the more vulnerable it is to Y2K failure. Thus, somewhat perversely, some of the lowest possible Y2K risks are to be found in the remotest parts of Africa where little computer technology is used.

Yet this same higher level of advancement generally means that countries are better equipped to cope with the possible consequences and have already started to take precautions. An important factor is the level of millennium bug awareness in a given country. Indeed, the most risky combination would be a technologically advanced nation with a poor record on awareness and/or action.

A good indication of awareness is the coverage the issue receives in the national press. In particular, Gartner Consulting has looked at the coverage in each country's leading business publications. The more debate is stimulated, the more businesses at all levels are aware of the need to act and become millennium compliant. Assess this level of business awareness together with the attitude of a country's central bank and of the national government itself, and the model begins to take shape.

The model then goes on to calculate Y2K sensitivity on a sector by sector basis. Certain industry sectors are obviously more prone to the Y2K issue: What is the possibility of disruption due to embedded systems? What is the likelihood of information systems failing? The system then predicts risk over a range of insurance products: first and third party risk, third party product and services risk, amongst others.

Far from definitive, the score will nevertheless be an important indicator as to the relative exposure of a potential client. It may set all too important alarm bells ringing. Taken into consideration with the usual assessment factors, we believe our new index will help underwriters make better informed judgements. Preparations are already in hand for a further phase of research.

The year 2000 is, of course, a completely new challenge for the international industry. It comes at what would be a demanding time anyhow because of soft market conditions. Together, these factors point to a December renewal season that will require some very fine underwriting judgement, even by recent standards. The LIRMA Y2K Index does not claim to provide all the answers, but we see it as a valuable tool in dealing with the demands of a unique set of circumstances.

Marie-Louise Rossi is chief executive of LIRMA and chief executive designate of the International Underwriting Association (IUA) which will be created later this year as the result of a merger between LIRMA and the Institute of London Underwriters. Tel: +44 (0) 171 617 4444. Fax +44 (0) 171 617 4440.