Finance 431Property-Liability Insurance

Topic: AsbestosGuest Lecturer: Gail M. Ross, FCAS,MAAA

March 3, 2005

Discussion Outline

What is Asbestos? Where is Asbestos Found? Health Issues Related to Asbestos Asbestos and P/C Insurance Magnitude of the Asbestos Problem Ways to Quantify Asbestos Liabilities Potential Solution to Insurance Issue

What Is Asbestos?

Fibrous minerals that exist in nature The fibers are strong durable and

resistant to heat and fire They are also long, thin and flexible

The material has been used in thousands of consumer, industrial, maritime, automotive, scientific and building products

Where is Asbestos Found? During the 20th century about 33

million tons of asbestos were used in industrial sites, homes, schools, shipyards and buildings in US.

Peak use was in the 1970s Insulation, fireproofing spray, floor

and ceiling tiles, roofing products, packing materials, insulated wire and panels, adhesives and brakes.

Health Issues Related to Asbestos

When the long, thin fibers of asbestos are inhaled they get into the lungs and are unable to be filtered out.

The lungs form tiny scars that lead to asbestosis evidenced by: Shortness of breath and reduced lung capacity Persistent cough Chest pain

In its worst form it can lead to lung cancer and mesothelioma (a type of cancer)

Health Issues Related to Asbestos

Manifestation rarely occurs less than 10 years following first exposure – more common after 20 years. Some of the diseases have latency periods as long as 40 years.

Asbestos and P/C Insurance Claims brought under three

coverages: Products Liability – per occurrence limit

and an aggregate limit Premises/Operations Liability – per

occurrence limit only Workers Compensation – statutes that

define limits

Asbestos and P/C Insurance Five “Tiers” of defendants:

Tier 1: Primary manufacturers and suppliers of asbestos in North America (fewer than 20 companies)

Tier 2: Similar to Tier 1 but with lower-use products or lower market shares (approximately 50 companies)

Tier 3:Manufacturers of products with encapsulated asbestos or local/regional distributors of asbestos

Tier 4: Owners or operators of property where asbestos products were used

Tier 5: Railroads facing liabilities from exposed workers

Asbestos and P/C Insurance Coverage Issue

From 1962 - 1971, an insured manufactured and distributed an insulation product that contained asbestos.

Over this time a group of insulation installers started coughing and feeling shortness of breath and in 1971 many were deemed to have asbestosis.

In 1971,1,000 installers filed suit against the manufacturer for asbestos related injuries.

Question: WHAT IS THE DATE OF LOSS????

Asbestos and P/C Insurance Continuous Trigger Theory

A loss is charged against any liability insurance policy in effect for any period from the time a covered person was first exposed to a harmful substance to the time the injury is finally manifested (i.e., when symptoms of an illness, such as asbestosis, are discovered).

Asbestos and P/C Insurance Exposure Theory

Liability is based on the time of the exposure to the cause of an illness or other loss. In cases of continuous exposure (e.g., a worker's exposure to silica dust, asbestos, etc.), all insurers with a liability policy in effect during the exposure period are liable; however, the liability may be allocated among insurers according to the length of time that their policies applied.

Asbestos and P/C Insurance Manifestation Theory

Coverage for an injury or illness is invoked or triggered at the time the loss becomes apparent (i.e., when the symptoms of an illness are manifested or when a loss is or should have been discovered). In cases of a long period of exposure to a hazardous condition during which several policies successively covered the risk, only the policy in force at the time a disease is detected is liable.

Asbestos and P/C InsuranceExample - Continuous Trigger Spread

Suppose it cost $100m in indemnity payments and $150m in defense costs to settle the claim.

Spread loss over 10 years that insured manufactured the product.

Each policy is responsible for $10m in indemnity and $15m in legal expense.

But if the insured only bought coverage with annual policy limits of $5m per occurrence/$5m aggregate with expenses in addition, the insurance would pay a total of $50m indemnity and $150m expense and insured would have to pay the remaining $50m out-of-pocket.

Magnitude of the Problem

Magnitude of the Problem

Total Projected Asbestos Liabilty - $200B

30%

31%

39%

US Insurers Foreigh Insurers Defendants-Uninsured

$60B

$62B

$78B

Magnitude of the Problem Until the late 1990s asbestos claims

seemed to have stabilized. Reasons for new wave of claims:

Most Tiers 1 and many Tier 2 asbestos manufacturers are bankrupt so attorneys are looking for other sources of compensation for claimants

They’ve turned to Tier 3 and 4 defendants that have less direct connection with asbestos but have available insurance limits and assets.

Lawyers “sign up” plaintiffs that are not ill, on the premise that they were exposed to asbestos and may become ill.

Ways to Quantify Liabilities Survival Ratio Method

Insurance Company determines the average asbestos payments made in the last 3 years, assumes that the same level of payments will occur in the future, and estimates how many years in the future payments will be made.

Reserve = Avg 3 Yr Payment x Number of Years

Ways to Quantify Liabilities Market Share Method

Insurance Company determines what percentage of asbestos payments they have made relative to the industry, determines what the projected ultimate liability is for the industry and takes their share of that liability.

Reserve = Mkt Share x Est. Industry Liability

Ways to Quantify Liabilities Ground-Up Exposure Analysis

Working through the claim and legal departments, Insurance Company reviews every policy they wrote to determine if they think the insured will have liability, determine the total limits written and estimates what share they might have on each policy.

Potential Solution Federal Legislation – FAIR Act of 2003

Was to have been a no-fault compensation approach where anyone with an eligible disease could file claim

Awards would be scheduled based on level of illness

$52B of funding would come from insurers and $52B would come from defendants

If needed, a contingent funding call could be made for $45B over 27 years

Bill fell through – another proposal is in the works.

Conclusion

Asbestos has been called the “Energizer Bunny” of Toxic Torts because it keeps going and going and going……