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Asbestos – The Perfect Storm. CAS Annual Meeting- Boston November 11-12, 2002. Michael E. Angelina, ACAS, MAAA – Consulting Actuary Tillinghast – Towers Perrin. Why So Much Litigation?. Large percentage of population exposed Signature diseases Potential for large jury awards

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asbestos the perfect storm

Asbestos – The Perfect Storm

CAS Annual Meeting- BostonNovember 11-12, 2002

Michael E. Angelina, ACAS, MAAA – Consulting Actuary

Tillinghast – Towers Perrin

why so much litigation
Why So Much Litigation?
  • Large percentage of populationexposed
  • Signature diseases
  • Potential for large jury awards
  • Economies of scale for plaintiffattorneys
  • Insurance recoverables
the asbestos litigation environment has changed
The Asbestos Litigation Environment Has Changed
  • Increasing costs to defendants...
    • Surge in claim filings
    • Rescission of previous settlement agreements between plaintiffs attorneys and defendants
    • Bankruptcies
  • ...and increasing costs to insurers and reinsurers
    • Increased costs for existing defendants
    • Additional costs for new defendants
    • Additional coverage accessed
surge in filings
Surge in Filings
  • Causes
    • “catch up” for CCR defendants post Georgine
    • acceleration of claim filings
      • anticipation of tort reform; bankruptcy creditor lists; statute of limitations
    • aggressive plaintiff attorneys
      • asbestos specialty firms, union hall screenings, Sunday sports page advertisements, Internet, doctors, new claims
  • Effects
    • Increased costs to all parties!!
      • change in disease mix mitigates the increase
      • continued ability to bundle claims will drive costs
change in disease mix

Manville Trust - Injury by Year Filed

100,000

90,000

80,000

70,000

60,000

(Denied) or Unknown

Non-Malignant

Number of Claims

50,000

Cancer

Mesothelioma

40,000

30,000

20,000

10,000

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Year Filed

Change in Disease Mix
change in disease mix6

Manville Trust - Injury by Year Filed

100%

80%

77%

82%

83%

89%

85%

86%

91%

84%

89%

87%

91%

93%

Non-Malignant

60%

Percent of Claims Filed by Category

Cancer

40%

Mesothelioma

20%

13%

12%

11%

9%

10%

9%

8%

7%

7%

6%

6%

4%

10%

6%

5%

4%

6%

5%

4%

5%

3%

4%

3%

2%

0%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Year Filed

Change in Disease Mix
increasing numbers of claimants are unimpaired
Increasing Numbers of Claimants Are Unimpaired

1982

4% of claims showed no manifest asbestos-related injury(RAND)

1993

Up to one-half of all asbestos claims have little or no physical impairment (Harvard Journal of Legislation)

1998

No evidence of disease in 57% of asbestos claims(Manville Trust)

74% of pending claims are unimpaired(confidential report prepared for a defendant)

Two-thirds of claims show no evidence of impairment(Babcock & Wilcox)

Vast majority of claims provide no evidence of impairment(W.R. Grace)

2001

Source: RAND

bankruptcy of defendants
Bankruptcy of Defendants
  • Currently at least 60 bankruptcies of companies with asbestos-related problems according to the December 2001, American Academy of Actuaries Public Policy Monograph at www.actuary.org
  • Bankruptcy cited as “legislative solution” by Babcock & Wilcox
  • New bankruptcies may:
    • Increase costs for remaining defendants
      • Several defendants cited higher settlement demands as a cause of bankruptcy
    • Cause need for additional defendants
      • Approximately 300 asbestos defendants in early 1980s
      • Estimates of ~2,000 published a few years ago
      • Over 6,000 today according to RAND
expansion of defendant list
Expansion of Defendant List
  • Defendant list continues to expand since asbestos was used historically in a wide variety of products, including:
    • yarn, thread, felt, rope packing, flame resistant cloth
    • steam gaskets and packings, plain and corrugated paper, rollboard, millboard, high temperature insulation, movie props
    • World War II Ship Building
    • molded brake linings, brake blocks, filler in plastics, flooring, pottery, insulated wire, pipe covering
    • brake shoes, clutch facings, cement, plaster, stucco, shingles, siding, tile, sewer pipes, blocks
    • corrugated roofing, roof sheathing, roofing cement
    • boiler insulation; insulation of walls, floors, mattresses
    • paints, varnishes, filter fibers, filter pads
  • According to RAND Study
    • Firms in current list of defendants span 77 of 82 possible 2-digit SIC codes/industries
    • Over 60% of expenditures are now from non-traditional defendants
how to quantify asbestos liabilities
How to Quantify Asbestos Liabilities?
  • Actuaries typically like to use past experience to predict the future
  • However, for asbestos we can’t use traditional actuarial methods (e.g., accident year loss development projections)
    • Long latency from exposure to disease manifestation
    • Potential involvement of multiple policy periods for individual claims
how to quantify asbestos liabilities12
How to Quantify Asbestos Liabilities?
  • Many use benchmarks or rules of thumb
    • Market share techniques
      • For example, 5% of GL premium volume for affected years translates to 5% share of ultimate liabilities
    • Survival ratio techniques
      • equals ratio of total reserves divided by average annual payments
      • U.S. net asbestos survival ratio was 7.6 (excluding Fibreboard) as of 12/31/2000
      • A.M. Best now using a survival ratio of 18.0
    • Comparisons to peer companies (e.g., significant reserve additions)
      • $5 - $10 billion in U.S. insurer reserve additions during 2001 estimated by Standard & Poors
    • Aggregate development
      • multiples of paid losses, case reserves, or reported losses
how to quantify asbestos liabilities13
How to Quantify Asbestos Liabilities?
  • Exposure-based modeling will improve understanding of ultimate A&E liabilities
  • For an insurer or reinsurer, it considers
    • Mix of insureds
    • Types of coverage
      • Policy wording
      • Attachment points and limits
      • Years of coverage
      • Claims handling and settlement activities
  • Greater understanding equips the defendant, insurer, or reinsurer to deal strategically with its exposure
recent estimates of ultimate liability

Focused on total awards to plaintiffs

  • Estimated # future filings by disease
  • Estimated indemnity cost and trended by disease
  • Loaded for expense

Top-Down

  • Focused on amounts paid by defendants
  • Assigned defendants to tier
  • Estimated # future filings, indemnity, and expense by tier
  • Allocated ultimates to year and compared to insurance coverage

Bottom-Up

Recent Estimates of Ultimate Liability
  • Tillinghast estimates ultimate loss & ALAE relating to U.S. exposure will be $200 billion
  • Two approaches:
estimation of ultimate personal injury claim filings

Tillinghast Projection of Asbestos Related Filings

Number of Filings

1995 - 1999

2000 - 2004

2005 - 2009

2010 - 2014

2015 - 2019

2020 - 2024

2025 - 2029

2030 - 2034

2035 - 2039

2040 - 2044

2045 - 2049

Calendar Year

Meso

Lung Cancer

Non-Malignant

Estimation of Ultimate Personal Injury Claim Filings
estimation of ultimate loss and expense

Tillinghast Projection of Asbestos Related Ultimate Losses

$ Expected Loss

1995 - 1999

2000 - 2004

2005 - 2009

2010 - 2014

2015 - 2019

2020 - 2024

2025 - 2029

2030 - 2034

2035 - 2039

2040 - 2044

2045 - 2049

Filed Year

Meso

Lung Cancer

Non-Malignant

Estimation of Ultimate Loss and Expense
allocate ultimate loss and expense among multiple payers

Defendant Cost

Retained

Insured

Direct – U.S.

Direct – London

Retained – U.S.

Retained – London

Ceded

Ceded

Other

Other

London

London

U.S.

U.S.

Allocate Ultimate Loss and ExpenseAmong Multiple Payers
coverage expansion
Coverage Expansion
  • Roll-forward of coverage blocks
  • Reclassification of products claims as non-products claims by traditional products defendants with installation activities with exhausted (or nearly exhausted) products coverages
    • reinstates previously exhausted products coverages
    • opens up previously “untapped” non-products coverages
    • non-products coverages may not have aggregate limits
portion of 200 billion ultimate loss and expense retained net insured u s net non u s
Portion of $200 billion Ultimate Loss and Expense – Retained, Net Insured U.S., Net Non-U.S.**

*$60 billion mid-point of $55 – $65 billion range of the “Universe” of net liabilities to the U.S. P/C market.

**Additional details available in Emphasis 2001/3, “Sizing Up Asbestos Exposure,” a publication of Tillinghast – Towers Perrin, at www.towers.com.

recent increases in recognized liabilities
Recent Increases in Recognized Liabilities

In the U.S.:

  • Allmerica – $33 million pre-tax per A.M. Best(February 2002)
  • American Financial – $136 million pre-tax per A.M. Best; $81.3 million after tax to cover asbestos, pollution and September 11 losses
  • CNA – $1 billion pre-tax per A.M. Best; $750 million after tax (August 3, 2001)
  • ECRA – $1 billion pre-tax estimated by A.M. Best (February 2002)
  • GE Global – $99 million pre-tax per A.M. Best(February 2002)
  • Safeco – $70 million pre-tax per A.M. Best(February 2002)
recent increases in recognized liabilities22
Recent Increases in Recognized Liabilities

And around the world:

  • Chester Street
    • placed in provisional liquidation (January 2001)
    • entered a “Scheme of Arrangement”(March 5, 2001)
  • Equitas
      • £1.5 billion as initially undisclosed portion of total strengthening as of March 31, 2000
      • £1.7 billion ($2.4 million) as of March 31, 2001 (announced July 2001)
  • Royal & Sun Alliance – $538 million for U.S. and U.K. (February 2002)
    • U.S. pre-tax charge of $241 million estimated by A.M. Best
where do we go from here recent changes in claims handling
Where Do We Go From Here?Recent Changes in Claims Handling
  • Asbestos claims handled differently than other torts
    • volume/docket pressure
    • bundling
  • Center for Claims Resolution (CCR) changes its procedures
    • abandons practice of routinely settling cases on a group basis and requiring members to share settlement costs (February 2001)
    • stops settling new asbestos claims for remaining 14 members effective August 1, 2001; in run-off
  • Equitas leads London insurers, requiring evidence of injury and product identification effective June 1, 2001
the coalition for asbestos justice
The Coalition for Asbestos Justice
  • Formed in 2000 as a nonprofit association to address and improve the asbestos litigation environment
  • Currently has eight members: Ace, Argonaut, Chubb, CNA, Fireman’s Fund, The Hartford, Liberty Mutual, and St. Paul
  • Mission: To encourage fair and prompt compensation to deserving current and future asbestos litigants by seeking to reduce or eliminate the abuses and inequities that exist under the current civil justice system
  • Coalition is not involved with insurance coverage issues
  • Working to effect change through public education (including the judiciary), amicus briefs, and jurisdictional litigation efforts
public education
Public Education
  • A primary mission of the Coalition is to foster a better understanding of the current asbestos litigation environment
    • Research and Studies (e.g., RAND Study update at www.rand.org)
  • Academic Scholarship
    • Victor E. Schwartz & Leah Lorber, “A Letter to the Nation’s Trial Judges: How the Focus on Efficiency Is Hurting You and Innocent Victims in Asbestos Liability Cases” 24 Am. J. Trial Advoc. 247 (2000)
    • Mark D. Plevin & Paul Kalish, “Where Are They Now? A History of the Companies That Have Sought Bankruptcy Protection Due to Asbestos Claims” Vol. 1, No. 1 Mealey’s Asbestos Bankr. Rep., Aug. 2001
  • “This is NOT your father’s asbestos defendant”
jurisdictional litigation efforts
Jurisdictional Litigation Efforts
  • Identifying jurisdictions that pose the biggest challenges for asbestos defendants and truly sick claimants
    • Key states: CA, IL, LA, MD, MA, MS, NJ, NY, PA, TX, WV
  • Meeting with counsel from these states to understand the current case management orders and identifying other due process issues
  • Advancing inactive dockets / pleural registries
  • Challenging consolidations and joinder rules
changes in the wind
Changes in the Wind?
  • There are a few signs in the asbestos litigation environment that business may not be as usual
    • A split in the asbestos plaintiff’s bar between those representing “real” cases versus those representing the non-impaired
    • Judge Weiner’s ruling in the Federal MDL dismissing all cases that were initiated through mass screenings
    • Efforts in current bankruptcies to establish medical criteria and the consolidation before U.S. District Judge Alfred M. Wolin
    • Hearing held by Judges Weinstein and Lifland in the Johns Manville bankruptcy proceeding
changes in the wind28
Changes in the Wind?
  • There are a few signs in the asbestos litigation environment that business may not be as usual
    • Judge Pickard’s ruling in Mississippi that he will no longer allow out of state plaintiffs to file suit in Mississippi
    • Various challenges to the West Virginia mass trial scheduled for June 2002
    • Pennsylvania Asbestos Litigation (SB 216) dealing with asbestos-related liabilities acquired via merger or consolidation
    • Many more articles in the business press and from investment analysts advocating the need for an asbestos solution
recent headlines
Recent Headlines
  • “Asbestos & Environmental Losses Nearly Doubled in ‘99” – BestWeek (July 10, 2000)
  • “Asbestos Claims Still Killing” – The Economist (August 19, 2000)
  • “Equitas significantly increases reserves for asbestos liabilities” – The Review (September 4, 2000)
  • “Insurer Asbestos Woes Grow” – National Underwriter (October 16, 2000)
  • “How Plaintiffs Lawyers Have Turned Asbestos Into a Court Perennial” – The Wall Street Journal (March 5, 2001)
  • “The Energizer Bunny of Toxic Torts” – Emphasis (First Quarter 2001)
  • “Asbestos Claims Surge Set to Dampen Earnings for Commercial Insurers” – A.M. Best Special Report (May 7, 2001)
  • “Asbestos Litigation in the US: A New Look at an Old Issue”- RAND Institute for Civil Justice (August 2001)
  • “The $200 Billion Miscarriage of Justice” – Fortune (March 4, 2002)
  • “The Asbestos Pit” – Time (March 5, 2002)
possible federal legislation
Possible Federal Legislation
  • The Fairness in Compensation Act (H.R. 1283/S758) did not advance
    • would have established the Asbestos Resolution Corp.
    • opposed by President Clinton and the plaintiff’s bar
  • Likely prospective proposals supported by the Asbestos Alliance (led by the American Insurance Association and the National Association of Manufacturers) will focus legislation on four areas
    • establishing objective medical criteria of asbestos-related impairment
    • liberalizing statues of limitations
    • eliminating consolidations
    • eliminating forum shopping
quotes from clients and colleagues
Quotes from Clients and Colleagues
  • “The claims are continuing.”
  • “We have more open accounts today then we did ten years ago. We’re seeing more claims against Main Street America – distributions, hardware, HVAC.”
  • “Claim filings have remained steady; we expected a decrease by now.”
  • “Asbestos is the energizer bunny of toxic torts; it keeps going and going and going...”
  • “We are seeing operations claims from new defendants (contractors, distributors)”
  • We’ve been approached by producers seeking finite cover. The cover might be a positive influence on financial analyst opinions … The defendants must anticipate that filings will continue … A small number of deals are being done.”
  • “I expect to see at least five more bankruptcies of asbestos defendants in the next 12 to 18 months.” (This was stated in September 2000; since then, numerous defendants have declared bankruptcy …)
  • “…endless search for a solvent bystander…”
  • “The life of HR1283 hinges upon the outcome of the presidential election.”
  • “Asbestos litigation is a profit-driven industry.”
  • “Don’t think of them as lawyers, think of them as venture capitalists.”
  • “… factories (be they lawyers) generating paper … Here’s the form, fill in the blanks … won’t end by when I die, even when my kids die …”
current status recap
Current Status Recap
  • Significant deterioration in liabilities at all levels
    • Defendants, insurers, and reinsurers
  • Generated by filing activities
    • Mitigated by shift in disease mix to claims with lower settlement values
  • Continue to see more bankruptcies or finite deals
  • May see increased attention to what the defendants are carrying on their balance sheets
    • Current focus has been from financial analysts, not auditors
  • More scrutiny from insurance regulators
current status recap cont d
Current Status Recap (cont’d)
  • More than 25 years after peak usage, we still see significant activity on the claims side
  • It’s the “Energizer Bunny” of toxic torts
    • It just keeps going and going and going ...
michael e angelina
Michael E. Angelina

Mr. Angelina is a co-author of Tillinghast’s study regarding the asbestos “universe,” first presented on May 30, 2001 to the RAA Education Conference and the Casualty Actuaries of the Mid-Atlantic Region (CAMAR). He is a principal of Tillinghast – Towers Perrin in its Philadelphia office.

Mr. Angelina is a member of Tillinghast’s asbestos and environmental practice area, and currently coordinates research and development activities relating to the contingent liabilities of corporate asbestos defendants assisting clients with asbestos-related operational strategies. He has quantified reserve needs for asbestos, pollution, and other health hazards (APH) for both domestic and international insurers and reinsurers. He has also written for Emphasis on asbestos issues, and has participated on various industry forums, trade press, and meetings regarding asbestos liabilities. Mr. Angelina is also active in the firm’s placement initiative for these types of exposures.

Prior to rejoining Tillinghast in January 2000, Mr. Angelina was Vice President and Actuary with Reliance Reinsurance Corp. (RRC). He also served as the Actuarial Officer of the Finite Risk unit. His responsibilities in the financial actuarial role included: modeling outwards reinsurance transactions, providing actuarial support and guidance for areas which had problematic implications to RRC’s financial results, and identifying new opportunities for growth. In the Finite Risk unit, Mr. Angelina’s responsibilities included: performing actuarial and underwriting analyses of loss portfolio transfers; developing the financial structure of potential deals; and performing due diligence reviews of target books of business.

Incorporating his 11 years at Tillinghast prior to rejoining the firm, Mr. Angelina has been involved in a number of client assignments including: ratemaking for personal automobile business; reserve reviews for insurers, reinsurers, excess and surplus carriers, and self insured entities; valuations of insurance operations in support of mergers and acquisitions; financial modeling; quantification of asbestos and pollution liabilities; and the development of pricing systems and size of loss distributions for multinational excess insurance coverages. He is a developer of RPIL, Tillinghast’s excess of loss pricing system, and part of the Global Loss Distributions (GLD) initiative.

Mr. Angelina is a frequent speaker at the Casualty Actuarial Society seminars on pricing and reserving for US and international exposures and has written on risk financing costs for Captive Insurance Company Reports, as well as asbestos-related issues. Prior to joining Tillinghast in 1988, Mr. Angelina worked for CIGNA in the workers compensation and the actuarial research units.

Mr. Angelina is an associate of the Casualty Actuarial Society and a Member of the American Academy ofActuaries. Mr. Angelina is a graduate of Drexel University with a B.S. degree in Mathematics.

Angelim@tillinghast.com(215) 656-2345

jennifer l biggs
Jennifer L. Biggs

Ms. Biggs is a co-author of Tillinghast’s study regarding the asbestos “universe,” first presented on May 30, 2001 to the RAA Education Conference and the Casualty Actuaries of the Mid-Atlantic Region (CAMAR). She is a principal of Tillinghast – Towers Perrin in its St. Louis office.

Ms. Biggs is a member of Tillinghast’s asbestos and environmental practice area. She coordinates research and development activities relating to asbestos and has quantified reserve needs for asbestos, pollution, and breast implant liabilities for insurance and reinsurance companies. Ms. Biggs has also been active in the firm’s asbestos and environmental reinsurance placement initiative.

Ms. Biggs has spoken at Annual Meetings of the Casualty Actuaries in Reinsurance and the Casualty Actuarial Society regarding asbestos liabilities. Under her direction as Chairperson of the American Academy of Actuaries Mass Tort Work Group a Public Policy Monograph: Overview of Asbestos Issues and Trends was released in December 2001.

Ms. Biggs also has significant experience in the professional liability area. Her work includes analyses of funding requirements, self-insured retention limits, and allocation systems for self-insured trust funds of several hospitals. She also performs reserve evaluations, opining on year-end statutory reserve levels for physician insurers. Additionally, she has assisted insurers by analyzing rate levels and preparing filing materials for entry into new states.

Prior to relocating to Tillinghast’s St. Louis office in 1988, Ms. Biggs spent almost four years in Tillinghast’s Bermuda office. There she gained considerable experience in financial reinsurance, performing pricing analyses for loss portfolio transfers. Most other assignments were related to loss reserving for reinsurance and captive insurance companies.

Ms. Biggs is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries. Ms. Biggs graduated with college honors from Washington University in St. Louis with a B.A. in mathematics and a business minor.

Biggsj@tillinghast.com(314) 719-5843