Casualty Loss Reserve Seminar New perspectives on asbestos

1. Casualty Loss Reserve SeminarNew perspectives on asbestos Paul Jardine Chief Actuary, Equitas Limited 10 September 2001

2. Contents • Asbestos • background and fact pattern • Equitas reserving approach • recent experience • survival ratios • market estimates • US industry reserves

3. Asbestos - background • Number of filings has emerged significantly above expectations • Claims severity has shown some volatile movement • Claimants believed to be filing against more defendants • Large number of assured bankruptcies • Demise of CCR • Introduction of DR’s and other initiatives by London Market • Revised market level estimates • Potential emergence of non-products claims

4. Statistic Trend Evidence Number of filings Up sharply Defendant reports Number of claimants ? Anecdotal Number of diseases Steady Mesothelioma, cancer incidence Cost per claim by type Upward bias Settlements and court decisions Cash outflows: Defendants Some increase Defendant reports  Other insurers Some increase A M Best  Equitas Slight increase, but below Accounting records actuarial expectations Asbestos - fact pattern

5. Asbestos - Equitas approach • Monthly asbestos Board reports • Extensive underlying research • Specific assured level projections - no “tier” assumptions • Combination of expected future numbers and amounts • Claims filings need to be adjusted for other factors • Scenario approach together with sensitivity testing • Extrapolation to assured and insured universe • Benchmarking to market - A M Best, Milliman, Tillinghast, survival ratios

6. Asbestos - recent experience at Equitas • Very few if any new defendants have emerged in last few years (although IBNER development has been significant) • Real issue has been numbers of claims being filed against defendants - vast increase and expected to continue • Disease incidence is tracking projections - impact of unimpaireds is significant distortion • Chapter 11’s slow claims reporting to insurers and defer payment for foreseeable future. • Bankruptcies may have led to increased filings on other defendants

7. Asbestos - survival ratios

8. Asbestos - market estimates

9. Market level estimates • Broad consistency across commentators for US insurance industry share • Significant divergence in views on non-US exposure and retained amounts • What does the Tillinghast figure for non-US represent or imply? • Total paid to date is $22bn US industry and $8bn non-US I.e. $30bn. • Future liability is $38bn US vs $54bn non-US • Past shares are 73% US, 27% non-US with the future split 41%, 59%!

10. Largest US reserves * excluding Berkshire Hathaway

11. How has the industry fared over time? • 1997 AAA survey of CFO’s and consulting actuaries: • most support discounted mid-point of reasonable range • claims horizon of at least 10 years • over 70% of respondents believed that asbestos liabilities were “reasonably estimable” • over 70% of respondents thought that the US industry exposure was less than $70bn • A M Best state: • “that reserving to ultimate will become more commonplace over the longer term” (1996) • “the industry needs to turn its attention to building its asbestos reserve base” (2000)

12. Casualty Loss Reserve SeminarNew perspectives on asbestos Glenn Brace Head of APH Claims, Equitas Limited 10 September 2001

13. 1. A London Action: Documentation Requirements2. Asbestos Bankruptcies: Problems and Opportunities CONTENTS

14. 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 A LONDON ACTION: DOCUMENTATION REQUIREMENTS

15. 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 THE DOCUMENTATION REQUIREMENTS

16. 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 THE DOCUMENTATION REQUIREMENTS 10

17. 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 THE DOCUMENTATION REQUIREMENTS

18. 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? THE DOCUMENTATION REQUIREMENTS: 5 FAQ’s

19. 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 negotiation final deals: Bankruptcy Code raises this possibility Possible legislative action? ASBESTOS BANKRUPTCIES: PROBLEMS AND OPPORTUNITIES