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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 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) 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 ExpenseDue to U.S. Asbestos Exposure 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 Bhagavatula
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 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 Russ
Select Reserve Russ
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 • 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 Russ
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
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 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 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 - Example Mesothelioma Filings Experience Collins
Ground Up Asbestos ModellingKnown Assureds Step 2 - Example Mesothelioma Filings Projection* * Using Stallard and Manton (1994) projection Collins
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 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 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 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 Collins
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 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 • 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