Liability associated with the year 2000 computer problem is the second-most important financial-risk rating issue for property/casualty insurers, an A.M. Best Co. vice president said today.

"Defense costs related to the Y2K issue will be very high in the first years of the next century," said Martin Sheffield, vice president in A.M. Best's property/casualty division. Speaking at "Fulfilling the e-Promise, A.M Best's annual insurance information conference, Sheffield went on to say that Y2K liability concerns are second in magnitude only to catastrophe risk.

Citing industry estimates of a $1 trillion total exposure, Sheffield said the biggest part of that risk was related to potential liability and defense costs, at $300 billion to $500 billion. Retrofitting of hardware and software for private industry was a close second, at $300 billion to $400 billion.

The greatest exposure to loss lies in the areas of directors and officers, product, and commercial general liability, Sheffield said.

"Property liability also should not be forgotten," he said, adding that potential property losses related to damage caused by Y2K-tainted embedded microprocessors are difficult to estimate.

On the life/health side, A.M. Best Senior Vice President Larry Mayewski noted that Y2K preparation had diverted industry attention and resources from longer-term issues, such as better using technology to reach new customers and serve existing ones.

"Technology no longer can be looked at as a back-office, administrative function," Mayewski said. He added that "strategic, offensive use of technology is critical for achieving sustainable competitive advantage."

Mayewski cited the successes of such financial service giants as Fidelity Investments as models insurers might want to emulate. He pointed out that Fidelity this year made 30% of its term life insurance sales over the Internet, up from 8% to 10% in 1997.

At the same time, he noted, not all products can be sold effectively through the Internet. Given the growing information base available to today's insurance consumers, Mayewski said that for all but the most commoditized products, "expert advice remains critical."

Mayewski discussed the importance of data-mining and database-marketing technology. While he gave the industry as a whole a "D" grade in this area, he said some companies are effectively using technology to generate business leads and cross-sell products to existing customers.

The increasing sophistication of consumers also mandates that insurers consider the development of multiple distribution channels.

"The customer is in the driver's seat," Mayewski said, "and the industry is going to have to pay a lot more attention to customer sophistication and preferences."