Getting By With A Little Help From Your Friends: Mutual Insurance & The Year 2000 Computer Date Problem

Risk/reward managers Z/Yen, suggest that even well prepared NGOs need to reduce the risks they face from the Year 2000 computer date change problem (Y2K risks). Mutual insurance could help.

Y2K Risks and NGOs

Y2K risks might be defined as business disruption due largely to computer, data processing and information networks disruption, not just directly to the risk-bearer but also to suppliers and wider environments in which they operate. The scale of risk is large – UK estimates alone suggest disruption and/or cure at well over £30 billion.

NGOs, like commercial and public sector organisations, are at risk. Indeed, most NGOs have some characteristics that indicate relatively high severity of risk:
• many NGOs persevere with old, obsolescent packages and bespoke systems for core activities such as fundraising, care services and grant making;
• NGOs often find it hard to agree budgets for one-off additional IT expenditure, e.g. sufficient investment in preventative work reducing Y2K risk;
• many NGOs regularly operate “lean and mean” with relatively low in-house information technology skills and structure;
• few NGOs have reserves sufficient to absorb major losses and costs such as those that might result from Y2K disruption.

Even well prepared NGOs are not immune from all the risks. The reader who believes their organisation to be completely free of Y2K risk almost certainly does not understand the potential problem. Do you believe everything your IT suppliers and IT people tell you? Your other IT projects don’t come in on time, why should your Y2K fix project be different? Of course, you can’t extend the deadline for this one beyond 31 December 1999.

Even well prepared NGOs are not immune from all the risks. The reader who believes their organisation to be completely free of Y2K risk almost certainly does not understand the potential problem. Do you believe everything your IT suppliers and IT people tell you? Your other IT projects don’t come in on time, why should your Y2K fix project be different? Of course, you can’t extend the deadline for this one beyond 31 December 1999.

How do we manage such potentially high and singular risks?

There are four generic approaches to managing risk: accept, avoid, transfer and reduce. We suggest that Y2K risks are unacceptable and mostly unavoidable. There are few viable market mechanisms for transferring Y2K risks. Organisations are therefore left with one option: reduce Y2K risks. Z/Yen advocates a co-operative approach to risk reduction to minimise potential harm to the community. We believe that the voluntary sector has both the need and the culture to embrace such an approach. Specifically, mutual insurance is an attractive way to provide a co-operative, albeit partial, solution to Y2K risks.

What is mutual insurance?

Mutual insurance is a mechanism through which organisations club risk. Famous examples include P&I clubs for shipping and professional indemnity mutuals (e.g. for lawyers). Essentially, a mutual insurance vehicle is a managed club, which enables similar organisations to pool their knowledge and their risk. We envisage three interlinked elements:

• action club (risk assessment procedures, shared knowledge of risk reduction methods);
• risk pooling club through a type of mutual known as a protected cell captive;
• traditional wholesale insurance for high end risks (e.g. through the reinsurance market).

This solution, albeit partial, has the following positive characteristics, it:

• drives information gathering, sharing and assessment rather than information control and selective use;
• leads to sharing solutions which may benefit the group as a whole;
• permits some risk transfer (e.g. the high end risk should become insurable);
• provides more flexibility in estimating risk, managing risk reduction programmes and handling claims;
• mutual support can help groups of organisations who share similar operations. This paper relates to NGOs, but the idea applies to other groups e.g. airlines, retailers, banks, utilities.

At present, chief executives, finance directors and information technology directors can spend significant sums of money on Y2K without achieving greater certainty that their efforts will result in risk reduction to acceptable levels. A mutual vehicle is a suitable approach to risks which are jointly suffered and non-competitive, but which are difficult to estimate in severity or likelihood.

Problem solved?

No. We believe this approach to be pragmatic, helpful and especially well suited to the voluntary sector. However, it is no panacea. Organisations will need to meet reasonable criteria of “fitness” in order to be eligible. This is not a magical way of avoiding the problem, rather it is a mechanism to share vital information and reduce the risk of losses from unforeseen Y2K disruption; risks you face despite your best efforts.

We are in the process of completing the structure of the mutual insurance vehicle, The Y2K Club, working jointly with Taskforce 2000 and a major City reinsurance house. If you want to be notified once we have further information, please contact Ian Harris or Michael Mainelli at Z/Yen on (020) 7562-9562.

Z/Yen specialises in risk/reward management, an innovative approach to improving organisational performance. Z/Yen clients to date include blue chip companies in banking, insurance and distribution as well as many charities and care organisations.

[an edited version of this article appeared as Michael Mainelli and Ian Harris, “Getting By With A Little Help From Your Friends – Mutual Insurance And The Year 2000 Computer Date Problem”, NGO Finance, Volume 8, Issue 3 (May 1998), page 32.]