New Perspectives on Asbestos

CLRS – September 23, 2002

Bhagavatula

Bhagavatula

Background

Miracle mineral Over 3000 applications OSHA guidelines since 1971 Asbestos containing products still legal in the U.S. Diseases marked by long latency period (average

15 to 40 years)

Bhagavatula

The Specter of Asbestos

Increase in claims reported by Manville and other defendants in 2000 and 2001 Majority of the plaintiffs filing claims are not impaired Defendant pool has expanded from 300 in the mid-1980’s to 6,000 today Over fifty asbestos-related bankruptcies to date Twenty asbestos-related bankruptcies since 2000 alone Average settlement demands for individual defendants have increased Legislative attempts have been unsuccessful so far The court system has ceased to be effective in the fair determination of liability The U.S. Supreme court has closed off the avenue for meaningful class action

settlements As companies file for bankruptcy, costs are being shifted to solvent parties and

new defendants Experts increase asbestos liability projections for defendants and insurance

companies

Bhagavatula

Milliman USA Estimates of Ultimate Loss and Expense

Due to U.S. Asbestos Exposure

$70B

$175B

$30B

Ultimate Paid of $275B

U.S.InsurersUninsuredLossesNon-U.S.Insurers

$22B

$20B

$8B

$50B Paid Through 2000

Bhagavatula

Agenda

Quantification Issues

Challenges

Recent Developments

Bhagavatula

Panelists

Moderator - Raji Bhagavatula, Milliman USA

Panelists - Jason Russ, Milliman USA- Jon Collins, Equitas- Gail Ross, Am-Re Consultants

Russ

Methods Used toEstimate Reserves

Traditional actuarial methods (loss development triangles) do not work

Russ

Methods Used toEstimate Reserves

Instead, use

Ground-Up Exposure Models Generally preferred method Needs a lot of data

Top Down Methods Simpler, but less reliable Uses aggregate data

Russ

Top-Down Methods

Use Benchmarks Annual Payments (Survival Ratio) Cumulative Paid Cumulative Incurred Case Outstanding Market Share

Russ

US Insurance Industry

Estimates as of 12/31/01 Paid $24B (average $1.5B per year) Reserve $13B ($4B case, $9B IBNR) Case Incurred $28B Total Recognized $37B Ultimate $70B – This is a very uncertain

number, but it is used here for illustrative purposes.

Russ

Survival Ratio

= Reserve / Annual Payment Industry survival ratio

$13B reserve / $1.5B avg payment = 9 If booked to ultimate, $46B / $1.5B = 31 AM Best using a discounted ratio of 12

Multiply avg payment by ratio to estimate reserve Problems

Distorted by unusual payments or changes in settlement activity, highly leveraged, assumes same as industry

Russ

Cumulative Paid

For Industry, reserve need is 2.0 x cumulative paid ($46B / $24B)

Multiply cumulative payment by factor to estimate reserve

Problems Assumes individual company is at same

maturity as industry

Russ

Cumulative Incurred

For Industry, reserve need is 1.7 x cumulative incurred ($46B / $28B)

Multiply cumulative incurred (paid + case reserves) by factor to estimate reserve

Problems Assumes individual company is at same

maturity as industry, assumes case reserve adequacy is similar to industry

Russ

Case Reserves

For Industry, reserve need is 11 x case reserves ($46B / $4B)

Multiply case reserves by 11 to estimate reserve

Problems Assumes individual company is at same

maturity as industry, assumes case reserve adequacy is similar to industry, highly leveraged

Russ

Market Share

Multiply Industry ultimate or reserve by companies share of market based on premium

Problems Very little relationship between amount of

premium collected and amount of asbestos loss exposure

Russ

Insurance Co ABC

Method Amount FactorIndicatedReserve

Paid 200 2.0 400

Incurred 275 1.7 468

Survival 20 31 620

Case 75 11 825

Mkt Share 70,000 .7% (-paid) 290

Russ

Ground Up Models

Review all open claims

Compare loss expectation for each insured to coverage terms

Add provision for unreported claims Review existing policies Loading using judgment

Russ

Model Ultimate for Open

Defendant Insurance Co ABC’s share

A 20

B 25

.

.

.

.

.

.Total 350

Russ

Model Ultimate

Ultimate BI on open claims 350Provision for PD 3% 10Provision for DJ 2% 7Provision for non-products 15% 53Paid on closed claims 150Ultimate for known claims 570IBNR claimsTotal ultimate

25% 143713

Indicated reserve 513

Russ

Select Reserve

Method Indicated ReservePaid 400

Incurred 468

Survival 620

Case 825

Mkt Share 290

Model 513

Selected ??

Russ

Considerations

Limits vs. Incurred Reinsurance

collectibility Insureds Policies without

claims

Expenses Pools Timing of last review Black Holes

Benchmarks may need to be adjusted based on these

Russ

Limits vs. Incurred Loss

Are most policies reserved to full limit? Is a full case reserve put up in consideration

of how insured’s loss will develop, or are minimal reserves booked?

For reinsurers, RCR vs. ACR

Russ

Reinsurance Collectibility

Disputes between insurers and reinsurers regarding asbestos claims are common

How are such issues reflected in the reserves?

Russ

Insureds

What insureds are reporting claims now that were not in the past?

How many such insureds have arisen over the past few years?

What provision exists for insureds who have not yet reported any claims?

Russ

Policies Without Claims

Are there cases where an insured that has policies for multiple years but has only reported claims for a few of the years?

How is this handled? Are reserves put up for all years or just those

specified by insured? Are there policy provisions that prevent claims

on those other policies?

Russ

Expenses (ALAE)

For some policies, expenses are contained with limits, for others paid in addition to limits

Defense costs may be greater than indemnity expense

Russ

Pools

Some reinsurance pools have asbestos exposure

How is participant’s reserve established for this? Accept reserve from pool manager? How did pool manager get reserve estimate?

Russ

Timing

When was estimate determined? Industry estimates and estimates of individual

defendants have significantly increased Ground-up studies done as recent as 2000 may

be outdated

Russ

Black Holes

Policies without aggregates

Coverage in dispute

Non-products

Collins

Ground Up Asbestos Modelling

Components of a typical company’s overall gross

asbestos reserve:

Known direct US asbestos assureds Unknown direct US asbestos assureds Other direct US asbestos liabilities (DJs, PD etc) Inwards reinsurance / retrocession liabilities for US

asbestos Non-US asbestos liabilities

Collins

Ground Up Asbestos Modelling Known Assureds

Reserving for known US asbestos direct assured:

Step 1: Value Open Claims (to assured)

Step 2: Project future (IBNR) claims

Step 3: Apply to insurance coverage

Collins

Ground Up Asbestos ModellingKnown Assureds

Step 1 - Value Open Claims (to assured):

Assured Level Data required (ideal): Historical settlement experience split by disease (split by

indemnity and expense) Breakdown of open inventory by disease

Often get only: Aggregate settlement experience across all diseases (split

indemnity and expense) No of open claims/closed

Collins

Ground Up Asbestos ModellingKnown Assureds

Step 1 - Example

Mesothelioma Settlement Experience

199619971998199920002001

250800300300500200

8,0002,500

15,0006,000

11,0009,000

No Settled Average Cost ($)

Selection for 2002 10,000

Collins

Ground Up Asbestos ModellingKnown Assureds

Step 1 - Example

MesoCancerNon-Malignant

250500

10,000

10,5003,000

750

No of Open Cases Average Cost*$

2.6251.500

7.50011.625

Total Cost$m

* With allowance for claims inflation

Disease

Collins

Ground Up Asbestos ModellingKnown Assureds

Step 2 - Value Future (IBNR) Claims (to assured):

Assured Level Data required (ideal): Historical settlement experience split by disease (split by

indemnity and expense) Historical claims filing experience by disease

Often get only: Aggregate settlement experience across all diseases (split

indemnity and expense) Aggregate filing experience across all diseases

Collins

Ground Up Asbestos ModellingKnown Assureds

Step 2 - Value Future (IBNR) Claims (to assured):

Generic information and assumptions required:

Epidemiological projections of rates of future disease incidence (to generate expected future filings)

Future claims inflation assumptions by disease

Collins

Ground Up Asbestos ModellingKnown Assureds

Step 2 - ExampleMesothelioma Filings Experience

0

20

40

60

80

100

120

1994 1995 1996 1997 1998 1999 2000 2001

Collins

Ground Up Asbestos ModellingKnown Assureds

Step 2 - ExampleMesothelioma Filings Projection*

* Using Stallard and Manton (1994) projection

0

20

40

60

80

100

120

Collins

Ground Up Asbestos Modelling Known Assureds

Step 2 - Example

Meso 2,057 15,000 30.855Cancer 5,000 4,500 22.500Non-Malignant 50,000 1,000 50.000Total 103.355

No of ProjectedFuture Claims

Average Cost*$

Total Cost$m

* With allowance for claims inflation (you would actually do this on a year by year basis, but we have simplified things here)

Disease

Collins

Ground Up Asbestos Modelling Known Assureds

Step 3 - Apply to insurance coverage:

Assured level data required (ideal):

Full insurance coverage information across all years impacted by asbestos claims (not just your policies)

Collins

Ground Up Asbestos ModellingKnown Assureds

Step 3 - Example

Total Assured Liability $m

Outstanding Claims 11.625

Future Claims 103.355

114.980

Apply Insurance Coverage

Self Insured 54.980

Other Insurers 40.000

Insurance Co. ABC 20.000

114.980

Collins

Ground Up Asbestos ModellingUnknown Assureds, DJs Etc

Unknown assureds:

Allowance will depend upon type of coverage sold Highly judgmental

DJs:

Normally a percentage load based upon past experience

Collins

Ground Up Asbestos ModellingInwards Reinsurance/Retro Liabilities

Principles as for direct assureds - model underlying direct exposure to cedant and then overlay reinsurance treaties

In practice limiting factors include: Lack of information on underlying coverage Lack of information on inuring reinsurance

protections (eg Fac.)

Collins

Ground Up Asbestos Modelling

A selection of issues that have to be addressed:

Non-products claims Insurance coverage interpretation and disputes Interpreting erratic historical settlement experience Interpreting erratic historical filing experience Impact of accelerated filings Impact of bankruptcies (direct and indirect) Selecting epidemiological projections Impact of multiple defendants Understanding underlying disease trends Factors influencing future claims inflation Quality of existing inventory and current filings Unimpaired claimants

Collins

Ground Up Asbestos ModellingNon-US Asbestos Liabilities

Number of people exposed very large Peak of exposure in Europe is much later than for

the US Size of claims is much smaller Unimpaired claims are not (currently) an issue For UK claims fall under Employer’s Liability

insurance, which operates on a per claim basis with no aggregate limit

Ross

Black Holes

“Long-Running Asbestos Claims Show No Sign of Coming to an End (Insurance Day, August 2002)

“Bankruptcies Force Asbestos Litigants to Seek Compensation from New Defendants” (Insurance Day, Jan.2002)

“Reinsurers Have Hands Full with Asbestos Claims Disputes” (National Underwriter, July 2001)

“Asbestos Funding Uncertain” (Business Insurance, June 2002)

“Insurers Could See Payout Timeline for Asbestos-Related Claims Shrink” (Wall Street Journal, April 2002)

Ross

What’s Causing the Black Hole?

New Wave of Claimants Expanded List of Targeted Defendants Joint and Several Liability Non-Products Coverage Pursuits Direct Liability Forum Shopping Increased Loss & LAE Severity “Pay Now” Judgments

Ross

New Wave of Claimants

Estimate of total asbestos related personal injury suits:

Mid-1990s: 0.6 millionCurrent: 1.2 to 2.4 million

Unimpaired Claimants1982: 4% of Claimants1993: 50%2000: > 66%

Source: Rand Corporation Institute for Civil Justice

Ross

Unimpaired Claimant Game

Plaintiffs attorneys file claims on behalf of non-sick claimants on the premise that they might become sick in the future from asbestos exposure

File “inventory claims” consisting of a handful of sick claimants with hundreds/thousands of non-sick claimants

Limited number of courts are swamped with huge number of claims

Ross

Unimpaired Claimant Game - Result

Forces defendants to pay settlements on the unimpaired claims to avoid going to trial on impaired claims

Genuinely sick and dying are often deprived of adequate compensation

Flood of claims has driven 19 asbestos defendant companies into bankruptcy since January 2000 (over 50 to-date)

Ross

Other Reasons for Increased # Claims

Once a bankruptcy occurs, surge of claims to beat bar date set by court

Attorney advertisements – more informed public

Concern that reform legislation may be imminent

Ross

New Defendants

The universe of potential defendants is expanding due to the bankruptcies of earlier (“traditional”) defendants

Claimants are suing any (“non-traditional”) defendant who may have been responsible for exposing them

Rand estimates that companies in more than half of all U.S. industries have been sued over asbestos-related claims

Ross

462%

196% 177% 139%64%

721%

296% 284% 275%187% 190%

1634%

0%200%400%600%800%

1000%1200%1400%1600%1800% “Traditional” Industries “Non-Traditional” Industries

Increase in Number of Asbestos Claims: 2001 vs. 1999

Source: Claims Resolution Management Corporation, III

Ross

Joint & Several Liability

Plaintiffs attorneys file claims against several dozen defendants

Under joint & several liability plaintiff may recover the full amount of the award from any of the defendants

Ross

Non-Product Coverage Pursuits

Product/Completed Operations liability coverage is generally written with an aggregate limit

As Products/Completed Operations liability limits have been exhausted, there’s been a trend towards filing new claims under Premises/Operations coverage which generally don’t carry aggregates

Ross

Direct Liability

Claimants are seeking to impose direct liability on insurers claiming they knew, or should have known about the presence of asbestos in insured’s location

Wise vs. Travelers (W. VA) – plaintiff alleges Travelers violated W. VA Unfair Trade Practice Act

Ross

Forum Shopping

Strategy used by plaintiff attorneys to have cases heard in states where juries have proven to be sympathetic and award large amounts

AL, MS, TX

Ross

Increased Loss & LAE Severity

Ripple effect of huge judgments Western MacArthur vs. St. Paul

Insurers/reinsurers spending more on legal expenses for DJs, damages lawyers and merits counsel

New drugs help those suffering from asbestos-related lung cancer live longer Could increase the damages award

Ross

“Pay Now” Judgments

Fuller-Austin vs Fireman’s Fund Policyholder’s bankruptcy plan required

immediate funding of future asbestos-related claims by insurer

If upheld, significant risk to insurers due to less time value of money on reserves

Ross

Bottom Line

Still lots of uncertainty on the ultimate size of the Black Hole

Agreement that there needs to be change and it’s happening London documentation

Collins

London Asbestos Developments

Documentation Requirements

Bankruptcies

Claim Valuation

Collins

London Asbestos Developments:Documentation Requirements

London Market insurers have issued “Documentation Requirements” (DR’s) designed to reimburse only claims supported by: Adequate medical evidence of a claimant’s

impairment Appropriate identification of the product

responsible for that impairment

Collins

London Asbestos Developments:Documentation Requirements

General Documentation Claimant’s name and social security number Copy of complaint (or other writing making claim) Amounts received from other parties (if discoverable)

Medical Documentation Different documentation for each disease type In all cases, a specific diagnosis that claimant’s

condition was caused “in substantial part” by asbestos Pleural plaques only reimbursed if governing law

allows recovery

Collins

London Asbestos Developments:Documentation Requirements

Product Identification and Exposure Documentation

Separate product identification requirements for products and premises/operations claims

A sworn statement that describes specific circumstances of exposure (unless claimant employed in one of designated occupations)

A comprehensive work history

Collins

London Asbestos Developments:Documentation Requirements

Other Provisions Assured may request an opportunity to

demonstrate sufficient evidence of injury and causation despite non-compliance with Documentation Requirements

Documentation Requirements may be modified if a different standard of proof applies in any particular jurisdiction

Collins

London Asbestos Developments:Documentation Requirements

FAQs1. Do the DR’s change the terms of policies or

coverage-in-place agreements?2. Are the DR’s consistent with governing law?3. Do the DR’s change past practice?4. Were policyholders involved in the issuance of the

DR’s?5. How can the DR’s benefit asbestos claimants?

Collins

London Asbestos Developments:Bankruptcies

Look for: Active involvement by insurers to ensure sound

trust procedures Adoption of Documentation Requirements by

bankruptcy trusts Vigorous fights against application of UNR Efforts to negotiate final deals:

Bankruptcy Code raises this possibility Possible legislative action (?)

Collins

London Asbestos Developments:Claim Valuation

More rigour is needed in the analysis of claims values by insurers

This helps assureds to more effectively negotiate underlying claims

Trial outcomes are frequently positive