Sober Y2K predictions

The recently held Employers Reinsurance Corporation seminar on Y2K risks delivered some serious food for thought. The most startling of the information revealed was delivered by the first three speakers who provided a broad outline of the technology disruption likely to impact not only on financial services but on the global economy as a whole.

Caspers Jones, a world-renowned Y2K commentator and chairman of the Burlington, MA-based Software Productivity Research Institute, suggests that up to three-quarters of enterprise in the U.S. could run into disruption problems when the countdown hits the big 2000 date.

Of the total industry sectors, including urban government operations, roughly 60% are currently lagging in preparation for Y2K. On a more positive note, Jones says the banks followed by insurance companies are the most prepared to deal with the problem followed by telephone companies and the airlines. What is less impressive is that, although the U.S. is far from ready to deal with Y2K risk, its European brothers are even less prepared. According to Jones, 15% of U.S. businesses might not fix the problem on time while members of the European Monetary Union could have up to 25% of problems not being fixed in time.

Both the U.S. banking and insurance industries face a 50% probability of disruption of services due to Y2K problem bugs, notes Jones. Local government is tagged as the laggard of U.S. enterprises with up to an 85% possibility of disruption to services, ranging from tax miscalculations, marriage and birth records misplaced to bond rates being downgraded.

In a similar vein of thought, Dr. Edward Yardeni, chief economist of Deutche Bank Securities, believes that while most computer systems will be fixed on time, there are likely to be cases where some “strategic” systems won’t, which could spark global financial chaos. In his presentation, Yardeni compared Y2K with the energy crises of the early 1970s. “Information is just as vital as oil for running our economies.” Is the outlook on the potential disruption resulting from Y2K too pessimistic, are people over-reacting, he asked the audience. Responding to his own question, Yardeni says, “in my opinion, it might be too optimistic to believe that the information gridlock won’t be even more damaging, sending us further back in time when the level of gross domestic product that our information systems supported was even lower. Therefore, I predict that, in the U.S., real GDP could fall 5% from peak to trough over a 12 to 24-month period starting late in 1999.”

Harris Miller, president of the Arlington, VA-based Information Technology Association of America (ITAA) reminded the seminar audience that it is insurers and bankers who need to push companies to ensure that they will be Y2K complaint by the crucial date. Furthermore, he suggests that, from an insurance perspective in dealing with the potential risk of Y2K, insurers should make greater use of Y2K certifying, similar to the standards applied by the International Standards Organization (ISO). The ITAA currently provides Y2K certifying although Miller admits that no insurance companies are using utilizing these services to measure the Y2K compliance ability of their clients.