Current Issues and Trends with Asbestos

Michael E. Angelina

Tillinghast - Towers Perrin

Casualty Loss Reserve Seminar

September 19, 2000

Minneapolis, Minnesota

Asbestos in the News

“Asbestos and Pollution Losses nearly doubled in 1999” - Best’s Review (July 2000)

“Equitas significantly increases reserves for asbestos liabilities” - The Review (August 2000)

Major Bankruptcies in last 12 months:

McDermott (Babcock and Wilcox)

Pittsburgh Corning

Armstrong posts $345 million charge to 1999 earnings (January 2000)

Agenda

Background Information

popularity, diseases, prior litigation

Current Status

Where we were

Where we are now

Modeling Process

Pricing Issues with Finite Covers

Tobacco

Questions / Comments

Background

“Miracle Mineral”

fire resistant, great insulator, flexible, strong

abundant quantities

Used everywhere

shipbuilding, construction, boilers, insulation, brakes, roofing material, Etc

Usage peaked in early 70s

virtually eliminated in the early 80s

People exposed - anyone who worked from 1930 to 1980

Background - Diseases

Lung Cancer

Asbestosis *

Pleural Thickening

Mesothelioma *

* Signature diseases

virtually all known cases relate to asbestos exposure.

Background - Litigation

Why so much litigation?

Signature disease

Large percentage of population exposed

Potential for large jury awards

Economies of scale for plaintiff attorneys

Insurance recoverables

Prior Defendant Activity

Generally level filing patterns

some surges in various jurisdictions (TX, MS)

driven by mass consolidations, tort reform

bouquet approach

lump meso and cancer high dollar cases with non malignants high frequency

Settlements vary by disease and jurisdiction

little variation by attorney

some upward trend on settlement amounts

Outside legal defense costs as a percentage of indemnity have decreased relative to prior levels

Prior Activity - Filings 1991-1995

0.0

10.0

20.0

30.0

40.0

50.0

1991 1992 1993 1994 1995

CCR 1 CCR 2 NonCCR 1 NonCCR 2

Prior Activity - Settlements by Disease

Countrywide State 1 State 2 State 3

Mesothelioma Lung Cancer Non Malignant

Prior Defendant Activity

Effect on cost to insurers and reinsurers

settlements paid by defendant (insured)

defendant recovers from insurers

insurers recover from reinsurers

Insurance Recoveries

previously agreed upon allocation procedures

based on years exposed, policy periods, and coverage terms

losses capped by products aggregates

procedures known as:

“rising water” allocation and “spillage” (no coverage)

Example of Coverage Chart

0

25,000

50,000

75,000

1970 1971 1972 1973 1974 1975 1976

Do

llars

(00

0s)

Primary Carrier 1 Primary Carrier 2 Excess Carrier 1 Insolvency

Excess Carrier 2 Non Insured Excess Carrier 3

Current Status

Considerable increases among US insurers in 1999

Equitas strengthened in 2000;

more to come in US (gross of reinsurance)

Significant activity in the placement of finite products for asbestos defendants (Turner and Newall) and insurers

Increased awareness at the federal level

HR Bill 1283 (S758) - spin-off of Georgine decision

“cries for legislative solution” -Justice Ginsburg

US Asbestos Reported Net Ultimate Losses (Note 27)

0.0

10.0

20.0

30.0

40.0

50.0

1992 1993 1994 1995 1996 1997 1998 1999

Cumulative Incurred Cumulative Net Paid

US Asbestos Reported Net Ultimate Losses (Note 27)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1993 1994 1995 1996 1997 1998 1999

Incremental Net Incurred Incremental Net Paid

Current ActivitiesPotential Causes for Increase

Surge in claim filings against defendants

began in 95 for non CCR members

hit the CCR in 98 (Georgine decision)

Bankruptcy / Coverage Exhaustion of defendants

causes need for new defendants or current defendants to make up the difference

Roll forward of initial coverage blocks

extension of previously agreed terms

Products reclassification

Current Activity - Non CCR Filings 1991-1999

0.0

10.0

20.0

30.0

40.0

50.0

1991 1992 1993 1994 1995 1996 1997 1998 1999

Avg 91-94 NonCCR 1 NonCCR 2

Current Activity - CCR Filings 1991-1999

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

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

Current Status-Surge in Filings

Causes

Tort reform accelerating time frame for claim filings

implies less filings later on

“catch up” of CCR defendants post Georgine

aggressive plaintiff attorneys

union hall screenings, Sunday sports page advertisements, Internet, doctors.

Effects

Increased costs to all parties!!

change in disease mix mitigates the increase

Current Activity - Average Annual Filings

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1991-93 1993-95 1996-97 1998-99

Non-CCR Filings CCR Filings

Current Activity - Average Annual Filings

Distribution of Filings by disease (1998)

Meso Lung Cancer Non Malignant

Distribution of Filings by disease (1994)

Meso Lung Cancer Non Malignant

Current Status-Reclassification of Filings

Some defendants with exhausted (or nearly exhausted) products coverage and insulation contractors are attempting to reclassify past, present and future claims from products to prem/ops claims.

Reinstates exhausted coverage under products

Allows for more coverage under Prem/Ops

No Aggregates under prem/ops

– unless Wellington Signatory

Current StatusRecap

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.

Current StatusRecap (con’t)

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 …