A company whose systems are euro-compliant will find it easier and quicker to do business: those that are not may be unable to trade in the new currency at all, writes Tony Illinesi.
It is an unfortunate coincidence that two of the greatest business challenges ever to face the information technology industry should come within a year of each other - the Year 2000 and the conversion of most European Union countries to a single currency.
Concern about the so-called millennium bug has drawn attention away from the euro, especially among companies that are based and trade mainly in countries not joining the new currency. A survey conducted recently by Barclays Bank, for example, found that 60% of UK businesses had done nothing to prepare for monetary union.
Even among European insurers and reinsurers, there is a wide variance in the level of understanding of the technical complications that will result from the euro. In parts of the United States and Far East, in particular, it is practically non-existent. Yet insurance, along with banking, is arguably the most global of industries and many of the giants, including the likes of Munich Re, Generali, Hannover Re and Cologne Re, are based in the European currency zone.
Only if you can predict with confidence that all of your clients, brokers, reinsurance suppliers, co-insurers and claimants will come from outside the euro zone, are you probably justified in doing little at this stage. But, in that case, you are almost certainly not a global player. Insurers and reinsurers, who aspire to be international, need to get abreast of the issue, no matter where they are based. A company whose systems are euro-compliant will find it easier and quicker to do business, while those that are not may be unable to trade in the new currency at all.
On 1 January 1999 most of the EU will become a dual currency area. The euro will co-exist with the "old" national currencies. Exchange rates will be irrevocably fixed, the European Central Bank will become fully operational and the euro will be used on the money and capital markets. By June 2002 at the latest, the old currencies will then be withdrawn and the euro will become the only legal tender. And it is during this transitional phase of two and a half years that much of the potential for confusion exists.
Research by a wide range of organisations has found that, even in Europe, many insurance companies only expect to be fully euro-compliant by 2002, intending to use the interim period to complete their conversion. Most such companies will have temporary systems in place to cope with any special needs that arise. Furthermore, even those that expect to be ready by 1999 may have underestimated the logistical problems involved. For example, some have not allowed for the fact that it can take up to six months to test the systems for compliance. The results of these shortcomings are almost certain, in some cases, to be chaotic.
My company, Computer Sciences International (a division of CSC Financial Services Group) worked with clients during 1997 in identifying the requirements for euro compliance. Their needs vary, and the solutions depend upon the functionality and flexibility of their systems, but with planning and partnership they can be resolved.
The euro throws up a number of business and accounting issues to be addressed and, in doing so, a company's IT systems will almost invariably be a potential bottleneck or, to view the scenario more positively, where the euro-solution is to be found. In assessing whether your company is fully euro-compliant, ask yourself whether you have considered the implications of the following new situations. Obscure as they may seem to the layman, they will ultimately affect the efficiency of your business and the ease with which you can deal with other companies.
Your IT systems will have to convert between currencies using six significant figures, which is one of the technical requirements laid down for EMU. Six significant figures can mean a rate of exchange of 0.00123456 or 12345600.0. For some systems this could cause problems because of a shortage of digits. During the interim euro period, however, even the best multi-currency systems will be put to the test. This is because it will be necessary to involve the new currency as well, creating a dual conversion via the euro, and that is when some will not be able to cope. For example, when converting from D-Marks to French francs, it will be necessary first to convert to the euro, and then from euros into francs. This can be technically far more complex.
The conversion of currencies for internal analysis affects all companies dealing with the euro. After 1 January 1999, statistics viewed in the original currency may no longer be complete, since some or all of the financial transactions may now be booked in euros. Triangulation statistics will need to be reviewed to ensure they provide the correct performance indicators. For example, viewed in original currency, incurred loss ratios may show a marked increase because the premium is now accounted in euros while the claim reserves continue to be advised in original currency. Without special action, your triangulations may lose their value.
There will be some latitude in how your company may wish to handle euro currency conversion in its internal accounts, and it should be possible to use home grown solutions for triangulation statistics produced for internal viewing only. It is different, however, for external presentation. Strict rules will apply on how to convert between two participating currencies. This is a fundamental requirement for participating currencies, and it will affect companies based or with operations in the UK. As Britain is part of the EU, many European clients may expect your company to adopt the rules.
Presentation of the euro
Internally this can be handled in a variety of ways. Where dual currency presentation is required, screens and reports can be enhanced to show both sterling and euro. A simpler approach may be to present the figures in sterling, then reproduce the screen/report in euros. Of course, the image you present externally may be totally different, and greater customisation and presentation of the figures may be required to respond to clients domiciled in a participating currency.
In addition to the considerations mentioned above, companies should prepare their systems for two contingencies.
First, they need to be able to accommodate other currencies that eventually join the system - most notably, of course, sterling. With so much business conducted in London, this would affect every international insurance and reinsurance company in the world.
Secondly, the possibility of a country leaving EMU should be taken into account. Although this is an almost heretical notion, no one can predict the strains that the disciplines of the single currency might impose on certain economies or how their governments might react. The near destruction of the European Monetary System in 1992/3, saved only by relaxing the fluctuation rates to 15% and allowing some currencies to depart altogether, serves as a reminder of the unpredictability of any scheme that imposes monetary conformity without any accompanying degree of political union.
As with the millennium, becoming euro-compliant does not require a high level of technical expertise. The challenge it poses is one mainly of awareness raising, planning and resources. Another similarity is that there is a skill shortage and finding the people who can do the basic work may prove difficult. Above all, it is too important a problem to be left entirely to IT departments; it is an issue for the board.
Whether or not your insurance or reinsurance company has come to grips with the euro will, of course, not affect the basic skills of underwriting, but it could make your company more efficient and attractive to deal with. Companies that come up with positive solutions will find themselves with a competitive advantage over many of their rivals.
Tony Illinesi is managing consultant at Computer Sciences International, a division of CSC Financial Services in London. The company specialises in supplying software packages and consultancy to the international insurance and reinsurance industries.