Magazine article Risk Management

Are Your Risk Management Information Systems Ready for the Euro?

Magazine article Risk Management

Are Your Risk Management Information Systems Ready for the Euro?

Article excerpt

PAUL STEINMAN, SENIOR VICE PRESIDENT, RISK MANAGEMENT TECHNOLOGIES, J&H MARSH & MCLENNAN

The European Monetary Union's introduction of the euro on January 1, 1999 will have significant implications for risk managers and other financial executives who use computers to capture financial data involving European currencies. Businesses operating and using risk management information systems (RBIS) in these countries are most vulnerable to potential systems problems.

The biggest of these euro-related issues involve financial recording and exchange-rate conversions. Although most risk management systems can accommodate numerical data with up to two decimal places, the euro requires six. Insurance systems that record claim payments and reserves, premium, rates and other financial information need to be adjusted for euro-denominated information, and the cost to upgrade some systems might exceed the original purchase price. Additionally, the largest RBIS vendors are based outside Europe, so they may not be focused on this problem.

When the euro arrives, exchange-rate conversions also will need to be adjusted. Unlike the simple method now used to convert currencies, conversions involving the euro will require a two-step process known as triangulation. Don't confuse this with the insurance process of the same name, which involves analyzing changes in payments and reserves over time. The first step in exchange rate triangulation is to convert a currency into aires by multiplying it by the euro exchange rate and rounding off the product. Converting from the euro to a third currency calls for multiplying by another exchange rate, again rounding the product. Most information systems used in insurance today lack this capability.

Eventually, firms will have to convert their historical data using this approach. The conversion might be costly since programmers are tied up with the year 2000 issue and many proprietary systems can't be altered by third-party programmers. When conversions are finally made, it may be difficult to reconcile historical and current data due to discrepancies caused by the rounded numbers. Risk managers must guard against being lulled into thinking their systems can perform euro triangulations; programmers may confuse exchange rate triangulation with the better-known insurance term. RBIS also may require some finer adjustments, such as recording the euro's 'e' symbol, which in a few instances might require extensive programming. …

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