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New Perspectives on Asbestos. CLRS – September 23, 2002. 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). The Specter of Asbestos.

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new perspectives on asbestos

New Perspectives on Asbestos

CLRS – September 23, 2002

background
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
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

agenda
Agenda
  • Quantification Issues
  • Challenges
  • Recent Developments

Bhagavatula

panelists
Panelists

Moderator - Raji Bhagavatula, Milliman USA

Panelists - Jason Russ, Milliman USA

- Jon Collins, Equitas

- Gail Ross, Am-Re Consultants

Bhagavatula

methods used to estimate reserves
Methods Used toEstimate Reserves
  • Traditional actuarial methods (loss development triangles) do not work

Russ

methods used to estimate reserves1
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
Top-Down Methods
  • Use Benchmarks
    • Annual Payments (Survival Ratio)
    • Cumulative Paid
    • Cumulative Incurred
    • Case Outstanding
    • Market Share

Russ

us insurance industry
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
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
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
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
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
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

ground up models
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

considerations
Limits vs. Incurred

Reinsurance collectibility

Insureds

Policies without claims

Expenses

Pools

Timing of last review

Black Holes

Considerations

Benchmarks may need to be adjusted based on these

Russ

limits vs incurred loss
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
Reinsurance Collectibility
  • Disputes between insurers and reinsurers regarding asbestos claims are common
  • How are such issues reflected in the reserves?

Russ

insureds
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
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
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
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
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
Black Holes
  • Policies without aggregates
  • Coverage in dispute
  • Non-products

Russ

ground up asbestos modelling
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
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 modelling known assureds1
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 modelling known assureds2

No Settled

Average Cost ($)

250800300300500200

8,0002,50015,0006,00011,0009,000

199619971998199920002001

Selection for 2002

10,000

Ground Up Asbestos ModellingKnown Assureds

Step 1 - Example

Mesothelioma Settlement Experience

Collins

ground up asbestos modelling known assureds3
Ground Up Asbestos ModellingKnown Assureds

Step 1 - Example

Total Cost$m

Average Cost*$

Disease

No of Open Cases

2.6251.500 7.50011.625

25050010,000

10,5003,000750

MesoCancerNon-Malignant

* With allowance for claims inflation

Collins

ground up asbestos modelling known assureds4
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 modelling known assureds5
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 modelling known assureds6
Ground Up Asbestos ModellingKnown Assureds

Step 2 - Example

Mesothelioma Filings Experience

Collins

ground up asbestos modelling known assureds7
Ground Up Asbestos ModellingKnown Assureds

Step 2 - Example

Mesothelioma Filings Projection*

* Using Stallard and Manton (1994) projection

Collins

ground up asbestos modelling known assureds8
Ground Up Asbestos Modelling Known Assureds

Step 2 - Example

Disease

No of ProjectedFuture Claims

Total Cost$m

Average Cost*$

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

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

Collins

ground up asbestos modelling known assureds9
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 modelling known assureds10
Ground Up Asbestos ModellingKnown Assureds

Total Assured Liability $m

Outstanding Claims 11.625Future Claims 103.355

114.980

Step 3 - Example

Apply Insurance Coverage

Self Insured 54.980Other Insurers 40.000Insurance Co. ABC 20.000

114.980

Collins

ground up asbestos modelling unknown assureds djs etc
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 modelling inwards reinsurance retro liabilities
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 modelling1
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 modelling non us asbestos liabilities
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

Collins

black holes1
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
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
New Wave of Claimants
  • Estimate of total asbestos related personal injury suits:

Mid-1990s: 0.6 million

Current: 1.2 to 2.4 million

  • Unimpaired Claimants

1982: 4% of Claimants

1993: 50%

2000: > 66%

Source: Rand Corporation Institute for Civil Justice

Ross

unimpaired claimant game
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
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
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
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

slide54

Increase in Number of Asbestos Claims: 2001 vs. 1999

“Traditional” Industries

“Non-Traditional” Industries

Ross

Source: Claims Resolution Management Corporation, III

joint several liability
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
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
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
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
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
“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
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

Ross

london asbestos developments
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

London Asbestos Developments:Documentation Requirements

Collins

london asbestos developments documentation requirements1
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

London Asbestos Developments:Documentation Requirements

Collins

london asbestos developments documentation requirements2
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

London Asbestos Developments:Documentation Requirements

Collins

london asbestos developments documentation requirements3
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

London Asbestos Developments:Documentation Requirements

Collins

london asbestos developments documentation requirements4
FAQs

1. 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?

London Asbestos Developments:Documentation Requirements

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 (?)

London Asbestos Developments:Bankruptcies

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

London Asbestos Developments:Claim Valuation

Collins

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