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Liability Storms and How to Quantify Their Effect. Casualty Actuarial Society Seminar on Ratemaking March 27, 2003 William R. Azzara Gail Ross, FCAS, MAAA. Outline. Overview of Liability Exposures Reasons to be Proactive and Quantify A Method to Use. Asbestos Pollution Lead Phen-Fen - PowerPoint PPT Presentation
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Liability Storms and How to Quantify Their Effect
Casualty Actuarial Society
Seminar on Ratemaking
March 27, 2003
William R. Azzara
Gail Ross, FCAS, MAAA
2
Outline
Overview of Liability ExposuresReasons to be Proactive and QuantifyA Method to Use
3
Liability Exposures
AsbestosPollutionLeadPhen-FenConstruction DefectToxic Mold
TobaccoAlcoholFirearmsLatex SensitivityMTBE
4
Pollution – Estimates are Stable
Slow growth in number of sites on the National Priority List
No dramatic changes in coverage case precedents, thereby encouraging settlements
Ongoing settlement activity has stabilized payment levels
Risk based corrective action has resulted in lower clean-up costs than originally expected by EPA
Greater PRP participation in site remediation – incentive to reduce / control costs
5
Pollution – Net U.S. Estimates
A.M. Best’s estimate of ultimate losses & ALAE = $56 billion
More recent estimates from other sources have been lowered to $30-$40 billion
A.M. Best believes that its estimate is still reasonably accurate, if not somewhat on the conservative side.
6
Phen-Fen
Diet drug manufactured by American Home Products (now Wyeth)
Serious health problems allegedly caused by product (e.g. heart valve and often fatal lung condition)
Wyeth settled large class for $3.5 billion but claims continue to be received
Wyeth recently added $910 million to its Phen-Fen reserve bringing total to $14+ billion
7
Construction Defect (CD)
“If you build it, they will sue” Claims allegedly caused by negligence in the
construction process General construction Toxic Mold EIFS/Synthetic stucco
Claims have resulted in changes in practices by insurers Pulling out of states Eliminating classes of business
8
Toxic Mold
High profile exposure to industry is primarily due to First Party Coverages Homeowners, Commercial Property, WC Recent CA case resulting in $18 million in punitive
damages in direct action against HO carrier
Limited claim activity from Third Party Coverages If liability emerges in future, will the Pollution Exclusion
apply?
Fitch recently concluded “Mold is not the next asbestos”
9
Tobacco
Significant claim activity for manufacturers Some for distributors, advertisers, suppliers
Types of exposures include Private lawsuits Reimbursement actions
Government recovery of medical costsPrivate reimbursement actions
Class Action suits have been certified
10
Tobacco
State medical cost recovery actions Settlement of 46 states Medicaid actions Payment of at least $206 billion Includes changes in business practices Voluntary settlement did not remove potential for
future liability Note recent CA verdicts of $28 billion and $3
billion respectively for two individual claimants Insurance industry exposure remains uncertain
11
Tobacco
Foreign Exposure Canada has several reimbursement actions
pending (Quebec suing for $200 million) EU, Colombia, Guatemala, Israel and others have
also filed actions (Spain has first European local government action)
Australian market faces large class action suit There may be no operable exclusions
12
Lead
Contamination from lead paint & plumbingPrimary defendants include:
Building owners Paint and pigment manufacturers or distributors Plumbing manufacturers and distributors
Plaintiffs include government agencies and building tenants
13
Lead
Frequency of claims has been less than the industry’s initial expectations
Plaintiffs have failed in certifying class actions Landmark RI suit against lead paint industry recently ended
in mistrial Similar litigation filed by Chicago, Milwaukee, St. Louis &
counties in TX and CA Additional litigation possible in CT, WV, NJ, MA, NH and
OH Concern that Market Share Distribution of liability could
result in significant costs Lead paint remains in 330,000 private homes and public
buildings in RI alone
14
Alcohol
Types of claimants: Consumers of alcoholic beverages Third parties injured by alcohol consumers Victims of FAS (fetal alcohol syndrome) Government agencies and health care providers
who provide care for alcohol related injuries
15
Alcohol
Alcohol industry has successfully defended itself against all alcohol consumption suits, to date
Concern over products liability exposure similar to asbestos No apparent contract exclusions However, product warnings do exist
16
Firearms
Products Liability actions are a recent phenomenon
Lawsuits include: Private and public recovery actions modeled after
government’s efforts against the tobacco industryAgainst defendants that include:
Manufacturers Retailers and Resellers Firearms Trade Associations
17
Firearms
Difficult to predict insurance implications due to recent activity Several manufacturers have placed their carriers on notice There are generally no specific applicable exclusions Market Share Distribution of liability remains speculative
but of concern for industry Plaintiffs are watching a Brooklyn case in which it is
alleged that manufacturers did nothing to prevent product misuse
Public appeal to have bullet shell “fingerprinting” by manufacturer
18
Latex Sensitivity
About 2.5% of the population is sensitive to the proteins contained in latex
Increased demand due to AIDS led to higher levels of protein in gloves
Hyper-sensitivity can cause skin and respiratory reactions leading to disability or death
19
Latex Sensitivity
Types of Claimants include: Healthcare workers Patients
The potential impact to the insurance industry appears manageable Courts have generally frustrated the plaintiff bar’s
attempts to certify class actions Most courts now address product identification
before allowing additional discovery
20
Methyl Tertiary Butyl Ether (MTBE)
Gasoline additive used as anti-knock compound (1979) and to improve combustion and reduce CO emissions (1992)
1995 – mandatory “Reformulated Gasoline” use results in 30% of nationwide gasoline sales contain MTBE
Use of MTBE will stop in 2003-CA to delay Identified as a possible carcinogen
21
MTBE
Alleged groundwater contamination from petroleum containing MTBE
Non-specific symptoms may lead to claimsPollution exclusion may not apply (Products
Liability)Government’s virtual mandate of use will
likely be used as a defenseRecent jury verdict against refiners in Lake
Tahoe drinking water contamination
22
Other Developing Exposures
Advertising Injury / Intellectual Property Genetically Modified Crops Managed Care SV-40
23
The Problem
Industry estimates of liability from latent exposures are significantly higher than the sum of amounts disclosed by companies
Some companies: Are slow to identify/quantify latent exposures Are under-reserved Have elected the business strategy of recognizing
the liabilities as claims develop
24
The Problem
Quantitative Effects Immediate and direct effect on current earnings
and equity/surplus of reflecting liability Uncertainty of future earnings drag if future costs
exceed established reserve
Qualitative Effects Management abilities questioned Mergers & Acquisitions limited by uncertainty
25
What is Needed
Identification of Exposure Coverages that might result in exposure Time span coverage was afforded
Quantify Ultimate Cost Potential frequency Potential severity Timing of future claim filings & payments Potential defense costs
26
Method to Quantify
Determine a company’s Latent Loss Liability using: Company’s own data Claim Specialists with working knowledge of
Latent Liability Losses Industry-wide data
27
Method to Quantify
Management InterviewsDetailed Claim File Review to determine
Amount and Timing of LossesActuarial Projections using Company
Specific and Industry data to estimate IBNRReinsurance Considerations
28
Method – File Selection
Target Claims selected for review based on: Current reserve size Presence of Declaratory Judgment (DJ) reserves Defendant name recognition Loss Type – Asbestos, Pollution, etc. Claim Status – Open, Closed, Re-open Year – Accident, Policy, or Underwriting
Random Claims – selected from remaining population
29
Method – File Review
Detailed Claim File Reviews End-of-Day Ultimate Losses are estimated on a
claim-by-claim basis for Target and Random Claims
Ultimate Losses are based on Industry Experience and the working knowledge of claim specialists
30
Method – File Review
Detailed Claim File Reviews (cont’d) Ultimate Losses include provisions for:
LossLoss ExpenseDJ ExpenseExpected Timing of Claim Payments
31
Method – IBNR Estimate
Provision for IBNR (Incurred But Not Reported) is split into two components: IBNER – Incurred But Not Enough Reported
Additional amount of reserve for known and unknown claims involving known insureds, known contracts and known/reported claim types
IBNYR – Incurred But Not Yet ReportedProvision for unreported claims involving unknown insureds and unknown contracts for known claim types
32
Method – IBNER Estimate
Estimate utilizes the results of: Target Claims file review Random Claims file review Loading for remaining claims based on Random
Claim file reviewAverage Ultimate Loss estimate is extrapolated over the Non-Target Claims to develop an estimate of Ultimate Losses for this group
33
Method – IBNYR Estimate
Provision for IBNYR Losses based on: Industry estimates of Ultimate Losses Claim Specialists’ estimate of “stage of
development” for the particular book “Traditional” Actuarial Approaches
Survival RatiosMarket Share Evaluation
34
Method – Reinsurance
Using a sample of claim files, the relationship of reinsurance to direct/gross liabilities is determined Intended vs. collected cessions
Based on these relationships, any ceded reinsurance liabilities are determined
How much uncollectible reinsurance?
35
Advantages of Method
Analysis performed at claim level Source of exposure and differences in claim
estimates can be pinpointed to specific types of claims, claimants, policies, etc.
Uses fewer global assumptions Can more effectively quantify the qualitative
aspects and uniqueness of the book
36
Advantages of Method
Claim Specialists perform a large part of the review Hands-on experience enables more accurate estimate of
potential exposure by tailoring analysis to specific factual damage and coverage information involved at claim level
Specific consideration of development stage and timing
Actuaries are involved where global assumptions are made