New Perspectives on Asbestos CLRS – September 23, 2002
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