CAS Seminar on RatemakingConcurrent Session: Emerging Risks – What Now?Asbestos Update

Jennifer L. Biggs, FCAS, MAAA – Consulting ActuaryTillinghast – Towers Perrin

Tampa, FloridaMarch 7-8, 2002

2

What is Asbestos?

Naturally occurring fibrous mineral with a crystalline structure containing long chains of silicon and oxygen

Six types actinolite crocidolite amosite tremolite anthophylite chrysotile

“Miracle Mineral” flexible fire resistant strong separable into filaments durable abundant quantities

“Protector of Human Life” ironically thought to be the protector of people

3

Usage

Peaked in the early 1970s; Congress passed OSHA in 1970 Contained in ~3,500 products in American commerce (1989 EPA

study) Still legal in the U.S. today

Ban on asbestos promulgated by the EPA in 1989 was remanded by the U.S. Fifth Circuit Court of Appeals in 1991

Only a few portions of the ban remained intact: new product uses commercial, corrugated, and specialty paper rollboard flooring felt

No effective warning label requirements Not tracked effectively

Large manufacturers report annually to Toxic Release Inventory No requirements for small manufacturers Imports (especially building materials)

4

Exposure and Disease

Exposure Early epidemiological studies estimated less than 20 million

workers experienced significant occupational exposure to asbestos Recent forecasts of the Manville Trust suggest an exposed

population in excess of 100 million Ongoing exposure

asbestos containing products asbestos in-place

Typical American breathes ~1 million fibers per year via natural and man-made sources

Disease Documented and recognized as cause of disease since 1920s

Pliny the Elder had noticed a significantly high number of lung related sicknesses in servants working with asbestos cloths and fibers

Pleural thickening, asbestosis, lung and other cancers, mesothelioma

Long latency

5

Why So Much Litigation?

Large percentage of populationexposed

Signature diseases

Potential for large jury awards

Economies of scale for plaintiffattorneys

Insurance recoverables

6

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

7

Claim Filings Appeared Fairly Stable in Early 1990s(T

housa

nds)

0.0

10.0

20.0

30.0

40.0

50.0

1991 1992 1993 1994 1995

CCR 1 CCR 2 Non-CCR 1 Non-CCR 2

8

Non-CCR Claim Filings Have Increased

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Avg 91-94 NonCCR 1 NonCCR 2

9

CCR Claim Filings Increased After Georgine’s Reversal

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Avg CCR 1(91-95) CCR 1 Avg CCR 2(91-95) CCR 2

10

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

11

Change in Disease Mix

1994 Filings - 25,800

Meso3%

Lung Cancer

6%

Non Malig91%

2000 Filings - 59,200

Meso2%

Lung Cancer

4%

Non Malig94%

Source: Manville Trust

12

Bankruptcy of Defendants

Currently at least 57 bankruptcies of companies with asbestos-related problems according to the December 2001, American Academy of Actuaries Public Policy Monograph Began in 1982 (Amatex, Johns Manville, UNR – 1982) Little activity among major defendants from 1994 – 1999 A new wave of bankruptcies beginning in 2000 and

continuing into 2002

2000: Armstrong World Industries, Burns & Roe Enterprises, E.J. Bartells, McDermott (Babcock and Wilcox), Owens Corning Fiberglas, and Pittsburgh Corning.

2001: Bethlehem Steel, Eastco Industrial Safety Corporation, Federal Mogul, G-I Holdings (GAF), Skinner Engine Company, U.S. Gypsum, U.S. Mineral, W.R. Grace, and Washington Group International.

2002: A.P. Green, Harbison Walker, Kaiser Aluminum, and RFI/Narco.

13

Bankruptcy of Defendants

Bankruptcy cited as a “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 1980s; a few thousand today

14

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 44 2-digit SIC codes/industries Entire US economy falls into 82 industries

15

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

16

How to Quantify Asbestos Liabilities?

Many use benchmarks or rules of thumb Market share techniques Survival ratio techniques Comparisons to peer companies (e.g.,

significant reserve additions) Aggregate development (multiples of paid

losses, case reserves, or reported losses)

17

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

18

Estimates of the “Universe”

Source

Tillinghast

Net U.S. Insurer/ReinsurerUltimate Loss & ALAE

$38 – $43 billion

Comments

Tillinghast 12/96 Estimate

A.M. Best $40 billion From 1997 A&E Study

A.M. Best $65 billion From May 7, 2001 Special Report

Tillinghast $55 - $65 billion Released May 30, 2001

19

Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability

0

10

20

30

40

50

60

70

80

1994 1995 1996 1997 1998 1999 2000

$ B

illio

ns

0

10

20

30

40

50

60

70

80

Tillinghast 12/1996 Ultimate ($38.0-43.0 billion) Tillinghast 2001 Ultimate ($55.0-65.0 billion)

A.M. Best 1997 Ultimate ($40.0 billion) A.M. Best 2001 Ultimate ($65.0 billion)

Cumulative Paid Outstanding (Case & IBNR)

20

Estimation of Ultimate Loss and Expense –Top Down

Estimate total awards to plaintiffs ~$200 billion Estimate number of personal injury filings by disease by calendar

year Estimate average indemnity by disease

Trend to future years Multiply future filings by trended severities Load for expenseF = # Claims S = Avg. Indemnity

Year Meso LC NM Meso LC NMTotal Cost Incl.

Expense20002001200220032004

...2010

...

2020...

2030...

2040...

Reflects exposure latency disease incidence, and propensity to sue

Trended(F X S)

x (1 + expense)

~1 million ~$200 B

21

Estimation of Ultimate Personal Injury Claim Filings

Tillinghast Projection of Asbestos Related Filings

1995

- 19

99

2000

- 20

04

2005

- 20

09

2010

- 20

14

2015

- 20

19

2020

- 20

24

2025

- 20

29

2030

- 20

34

2035

- 20

39

2040

- 20

44

2045

- 20

49

Calendar Year

Nu

mb

er o

f F

ilin

gs

Meso Lung Cancer Non-Malignant

22

Estimation of Ultimate Loss and Expense

Tillinghast Projection of Asbestos Related Ultimate Losses

1995

- 19

99

2000

- 20

04

2005

- 20

09

2010

- 20

14

2015

- 20

19

2020

- 20

24

2025

- 20

29

2030

- 20

34

2035

- 20

39

2040

- 20

44

2045

- 20

49

Filed Year

$ E

xpec

ted

Lo

ss

Meso Lung Cancer Non-Malignant

23

Estimation of Ultimate Loss and Expense – Bottom Up

Estimate total cost to defendants ~$200 billion Develop database of defendant experience to year-end 2000

Number of filings against defendants Average indemnity (defendant’s share) Expense-to-indemnity ratios

Resulting distributions vary by tier

The Types of Asbestos Defendants

Tier 1: Manufacturer/producers in litigationsince inception Will use all available insurance

coverage

Tier 2: Became involved shortly after Tier 1companies Some will exhaust all insurance

coverage Others will not hit highest layers

due to smaller share of industry

Tier 3: Manufacturers, distributors andinstallers brought into litigation dueto Tier 1 and Tier 2 bankruptcies Lesser exposure due to

encapsulated products or limiteddistribution

Tier 4: Owned/operated facilities whereasbestos used and third partiesexposed on premises

24

Estimation of Ultimate Loss and Expense – Bottom Up

Project future filings for each defendant implies ~60 defendants per plaintiff case

Project future severities by defendant implies average ultimate severities of $1,873 to $5,550 –

vary by tier.

Project future expenses (defense costs) by defendant Implies average ultimate expense loads of 20% to 116% –

vary by tier. Reflects a reduction in expenses for Tier 3-Low defendants

over a five year period.

25

Estimation of Ultimate Loss and Expense – Bottom Up

Determine percentage insured Allocate indemnity and expense to year Compare to average coverage profiles

Expense treatment varies by policy

Consider reinsurance cessions

Asbestos Insured XYZ's Coverage Chart

1930…

1978 1979 1980 1981 1982 1983 1984 1985 1986

Year

Co

vera

ge

Am

ou

nt

$

Primary

Excess 1

Excess 2

Excess 3

Excess 4

Excess 5

----------------- Self - Insured --------------------

26

Allocate Ultimate Loss and Expense of $200 BillionAmong Multiple Payers

Defendant Cost

Retained

Insured

Direct – U.S.

Retained – U.S. Ceded

U.S. London Other U.S. London Other

Direct – London

Retained – London Ceded

27

Portion of $200 billion Ultimate Loss and Expense – Retained, Net Insured U.S., Net Non-U.S.

Net U.S. Insured30%*

Retained by

Defendants39%

Net Non-U.S.

Insured31%

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

28

Recent Changes

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 Split in the asbestos plaintiffs bar Federal MDL dismissal of cases initiated through mass screenings The Coalition for Asbestos Justice

Formed in 2000 as a nonprofit association to address and improve the asbestos litigation environment

Working in three areas

public education, including the judiciary

Amicus Curiae Briefs

Jurisdictional Litigation Efforts

29

Possible Future Legislation

The American Insurance Association and the Asbestos Alliance are working together on legislative initiatives

Current proposals would focus any legislation on four areas Establish objective medical criteria for

asbestos-related impairment Liberalize statues of limitations Eliminate consolidations Eliminate forum shopping

30

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, more than ten defendants have declared bankruptcy …)

“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 …”

31

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

32

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 ...

33

Michael E. AngelinaMr. 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 consulting actuary with 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.

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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 consulting actuary with 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.