camar - spring 2005 meeting

Click here to load reader

Post on 19-Jan-2016

28 views

Category:

Documents

0 download

Embed Size (px)

DESCRIPTION

Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA. CAMAR - Spring 2005 Meeting. Princeton, NJ June 2, 2005. Agenda. Concerns in the Current System Quantification of Liabilities Potential Solutions. Concerns in the Current System (1). - PowerPoint PPT Presentation

TRANSCRIPT

Casualty Actuarial Society Seminar on Reinsurance Concurrent Session: Current Events Changes in Asbestos LiabilityPrinceton, NJ
Quantification of Liabilities
Plaintiffs should demonstrate injury to file a claim
The number of claim filings has increased dramatically
2003 claim filings against the Manville Trust exceeded 100,000
Fewer than 10% of claims are malignant
Per RAND, to ¾ are unimpaired
The right to seek recovery if/when an injury manifests should not be limited
Each claim should stand on its own merit
Restrictions on mass consolidations
Venue should be controlled
©Towers Perrin
2004 Manville Trust Claim Filings: 14,500
2005 Manville Trust Claim Filings: 9,300 at May 2005; 22,320 annualized
©Towers Perrin
1982
(RAND)
1993
Up to one-half of all asbestos claims have little or no physical impairment (Harvard Journal of Legislation)
1998
(Manville Trust)
Two-thirds of claims show no evidence of impairment
(Babcock & Wilcox)
(W.R. Grace)
Source: RAND
©Towers Perrin
Concerns in the Current System (2)
A low percentage of total payments have reached the claimants. Per RAND:
30% - defense transaction costs
41% - to claimants
Resources are limited
Future sick may not be compensated
©Towers Perrin
per Year
While only five bankruptcy petitions were filed during each of 2003 and 2004, the reduced level should not be misinterpreted as a sign of improvement in the asbestos litigation crisis. Rather, the number of 2003-2004 petitions was likely lower as defendants delayed decisions as they awaited the outcome of federal reform efforts.
Note: Graph excludes a bankruptcy in 1976.
©Towers Perrin
Can take years to complete1
File petition
Intended to be completed within a few months of filing
Negotiated and voted on before filing
Combined hearing to confirm plan and disclosure
Traditional
Pre-Packaged
1 Johns Manville filed bankruptcy in 1982 and its plan was not confirmed until 1988; Babcock & Wilcox filed bankruptcy in 2000 and its plan has not yet been confirmed.
Insurance coverage generally exhausted or settled, or insurers included in negotiations
Court appoints claimant representatives
Future’s Rep involved in negotiation for >50% equity
Commonly include a pre-petition trust to pay near full value on current claims
Plaintiff attorneys with large inventories negotiate matrix agreements that benefit their own clients, but do not owe a duty to all claimants
Disease criteria broadly defined
Claimants not fully compensated, so remain eligible to vote on the bankruptcy plan
Generous awards to lower disease severity classes
Significant portion of equity can be secured (therefore not available to bankruptcy trust)
Insurers interests are not represented in pre-petition negotiations
©Towers Perrin
Problems with Pre-Packaged Bankruptcies
Negotiated in secret by a select group of lawyers, whose clients receive preferential treatment relative to other claimants with similar disease
Future’s Representative bound by pre-petition settlements
Debtor is negotiating with insurers’ money
Conflicts of interest are abundant
Source: Mark D. Plevin/Crowell & Moring LLP
©Towers Perrin
From appointment of Kenesis (5/2002) until pre-package bankruptcy filed (9/16/2003), AC&S settled more than $2 billion of claims
Settlements over prior 20 years totaled $600 million
Pre-packaged plan stipulated that these settlements could not be challenged by the asbestos trust or AC&S
GHR
Kenesis
70% Ownership
Paid $3M to review documentation of 250,000 Category D claimants
Purchased Clearing House in June 2003
Paid $2M as subcontractor of Kenesis
Sole proprietor, J. Benee Wallace, paralegal of Ness Motley
©Towers Perrin
On 1/23/04 Judge Newsome (Delaware federal bankruptcy court) denied confirmation of the AC&S pre-packaged bankruptcy plan, finding that the plan
Was not proposed in good faith
Unjustly prejudiced by plaintiff attorneys
Largely drafted by and for the benefit of the pre-petition committee through various pre-petition settlements
Unfairly favors one plaintiff over another
Fundamentally unfair that one claimant with non-symptomatic pleural plaques will be paid in full, while someone with mesothelioma runs the substantial risk of receiving nothing
Both should be compensated based on the nature of their injuries, not based on the influence and cunning of their lawyers
“The court is informed that other judges have confirmed plans with such discriminatory classifications. This judge cannot do so in good conscience.”
©Towers Perrin
Many use benchmarks or rules of thumb
Market share techniques
For example, 5% of GL premium volume for affected years translates to 5% share of ultimate liabilities
Survival ratio techniques
equals ratio of total reserves divided by average annual payments
U.S. net asbestos survival ratio at year-ends 2001, 2002, 2003 = 8.8, 11.4, 10.6, respectively
A.M. Best using an undiscounted survival ratio of 18 - 20.
Aggregate development
Comparisons to peer companies (e.g., significant reserve additions)
©Towers Perrin
Exposure-based modeling will improve understanding of ultimate A&E liabilities
For an insurer or reinsurer, it considers
Mix of insureds
Types of coverage
Greater understanding equips the defendant, insurer, or reinsurer to deal strategically with its exposure
©Towers Perrin
Asbestos Insurer/Reinsurer
Exposure-Based Analysis
(1) Identification of exposure to asbestos defendants
(2) Projection of ground-up ultimate loss and expense for known asbestos defendants
(3) Allocation of defendant losses across coverage block
Comparison of losses in a given year to insurer / reinsurer coverage terms
Provision for non-products losses
Provision for “pure” IBNR
Tier 1: Manufacturer/producers in litigation since inception
· Will use all available insurance coverage
Tier 2: Became involved shortly after Tier 1 companies
· Some will exhaust all insurance coverage
· Others will not hit highest layers due to smaller share of industry
Tier 3: Manufacturers, distributors and installers brought into litigation due to Tier 1 and Tier 2 bankruptcies
· Lesser exposure due to encapsulated products or limited distribution
Tier 4: Owned/operated facilities where asbestos used and third parties exposed on premises
©Towers Perrin
Exposure-Based Analysis:
List all asbestos claims / notices
Identify all coverage issued to major asbestos defendants
Review non-asbestos claims/notices
Search of underwriting records for direct coverage and facultative reinsurance
Cedent audits for reinsurers’ treaty business
Review coverage profiles of major defendants to identify cedent involvement and potential reinsurer treaty coverage
Research corporate genealogy
©Towers Perrin
Exposure-Based Analysis:
Practical Issues:
“Missing” coverage
Potential reinsurer benefit from client’s inuring facultative coverage
©Towers Perrin
Exposure-Based Analysis:
for an Asbestos Defendant
Estimate expense load
Incremental v. cumulative experience
©Towers Perrin
Exposure-Based Analysis:
for an Asbestos Defendant
Transaction costs have consumed more than half of total spending and are likely to increase in the future
No formal joint defense mechanisms remain (e.g., ACF, CCR)
“Settlement” philosophy hasn’t worked
Newer defendants
Block
Compare to available coverage
Consider other erosion of products aggregate limits
Consider reinsurance cessions to estimate net losses
Chart1
1930 …
1930 …
1930 …
1930 …
1930 …
1930 …
1978
1978
1978
1978
1978
1978
1979
1979
1979
1979
1979
1979
1980
1980
1980
1980
1980
1980
1981
1981
1981
1981
1981
1981
1982
1982
1982
1982
1982
1982
1983
1983
1983
1983
1983
1983
1984
1984
1984
1984
1984
1984
1985
1985
1985
1985
1985
1985
1986
1986
1986
1986
1986
1986
Primary
0
0
0
0
0
0
50
50
50
50
0
0
50
50
50
50
0
50
50
50
50
50
0
50
50
50
50
50
0
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
50
0
0
0
0
0
0
Sheet1
SIR
Excess1
Excess2
Excess3
Excess4
Excess5
1930 …
0
0
0
0
0
0
1978
50
50
50
50
0
0
1979
50
50
50
50
0
1980
50
50
50
50
50
0
1981
50
50
50
50
50
0
1982
50
50
50
50
50
50
1983
50
50
50
50
50
50
1984
50
50
50
50
50
50
1985
50
50
50
50
50
50
1986
0
0
0
0
0
0
1987
0
0
0
0
0
0
Sheet1
Primary
Sheet2
column1
1
11
column2
1
11
column3
1
11
1
11
1
11
1
11
1
11
1
11
1
11
1
11
Primary - Insurer JKL
(4) Comparison of Losses to Coverage Terms
Example: More detailed coverage description of Excess 1 Layer in 1980
Excess 2
Excess 1
(4) Comparison of Losses to Coverage Terms
Example: Comparison of Losses in a Given Year to Insurer / Reinsurer Coverage Terms
If Insurer ABC wrote 10% of $5 million xs of $1 million in 1980, and ultimate losses allocated to 1980 totaled
$1,000,000, then Insurer ABC’s gross liability would be $0
$4,000,000, then Insurer ABC’s gross liability would be $300,000 (= 10% x ($4,000,000 – $1,000,000))
$6 million, then Insurer ABC’s gross liability would exhaust its limit of $500,000
©Towers Perrin
Exposure-Based Analysis:
Most often premises related
Non-products losses by traditional products defendants
A limited number of traditional products defendants have been successful in bringing non-products claims
Attorneys are clever
File operations claims to access additional coverage, generally written without aggregate limits
Aggregate limits may be imposed
Wellington
Significant property damage liability experienced by only a few defendants
DJ Expenses
Consider DJ reserves
Consider (changes in) staffing levels
©Towers Perrin
Exposure-Based Analysis:
Emergence of additional exposure arising from additional coverage / new defendants
Estimate annual emergence
Consider severity of new exposure
Adverse development on known accounts
Uncertainty with newer risks
Coverage identification / ”missing” policies
©Towers Perrin
Exposure-Based Analysis:
Best practice: directly reflect terms of outward reinsurance protections applied to gross loss estimates
Model gross, ceded and net directly
However, some outward programs are too disparate / complicated to model
Some insurers can provide gross estimates to ceded reinsurance department
Common practice: review historical net / gross ratios by homogenous groupings
Paid ratios may not be reflective of future
May be distorted by a few large accounts
May not adequately reflect future cessions in excess-of-loss programs
Consider reinsurance collectibility: commutations, insolvencies, disputes
©Towers Perrin
Exposure-Based Analysis:
Why have projections missed the mark in the past?
Choice of methods
Reform efforts
©Towers Perrin
Portion of $200 billion Ultimate Loss and Expense – Retained, Net Insured U.S., Net Non-U.S.**
*$60 billion mid-point of $55 – $65 billion range of the “Universe” of net liabilities to the U.S. P/C market.
**Additional details available in Emphasis 2001/3, “Sizing Up Asbestos Exposure,” a publication of Tillinghast –
Towers Perrin, at www.towers.com.
©Towers Perrin
Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability
©Towers Perrin
Recognition of Asbestos Liabilities
Based on Note 29 Annual Statement data as of 12/31/2002 and public disclosures of reserve charges during 2003.
*Note, for some companies 2003 gross (or ceded) amounts were not disclosed, so only the net amount is included.
©Towers Perrin
Recent Increases in U.S. Asbestos Liabilities
U.S. Insurers have increased asbestos reserves by at least $12 billion gross ($8 billion net) since the beginning of 2003
The Hartford – $4.0B gross, $2.6B net (May 2003)
Travelers - $3.2B gross, $2.6B net (Jan 2003)
ACE USA - $2.2B gross, $0.3B net A&E (Jan 2003)
Swiss Re America - $520M gross, $458M net (Q4 2003)
CNA - $517M net A&E (Q3 2003)
Allstate - $514M net (Q2&Q3 2003)
AIG - $440-450M net (Q4 2003)
Liberty Mutual - $405M gross, $331M net (Q3 2003)
Chubb $250M net (Q4 2003)
Argonaut - $52.8m (Mar 2003)
©Towers Perrin
No change as of Q1 2002
£0.4B gross discounted (Q1 2003)
£0.3B gross discounted (Q1 2004)
Royal & Sun Alliance (amounts in Sterling)
£371M for U.S. and U.K. (Feb. 2002)
£150M for U.S. and U.K. (Sept. 2003)
£500M for U.S. and U.K. (March 2004)
©Towers Perrin
Some companies recognized increases each year, others less frequently
Not all insurers included in the “dirty thirty” have increased reserves by a significant amount
Increases in anticipated cessions exceed increases in net amounts recognized by reinsurers
Some reinsurance is non-U.S.
Prior to 2002 insurer disclosures
Guesswork
Specific assumptions underlying the actual analyses are critical and many details are still not disclosed
©Towers Perrin
Manville Trust Recent Claim History
The Manville 2002 TDP is almost exactly the same as the TDPs in emerging and pending asbestos trusts
From October 1, 2003 through March 31, 2005, a period of 18 months, the CRMC received approximately 28,000 Manville Trust claims
In the first 9 months of 2003, the CRMC received approximately 90,000 Manville Trust claims
Why such a dramatic decrease in claim filings?
Source: David Austern, CRMC, April 6, 2005 ACI Meeting
©Towers Perrin
2002 Revised Manville Trust Distribution Process (TDP)
The 2002 Manville TDP differs from the 1995 TDP in the following ways
There is a requirement of Significant Occupational Exposure (“SOE”)
There is more stringent medical criteria under the 2002 TDP
An independent claims forecaster re-evaluated claims filed between 2000 and 2003 under the 1995 TDP to determine how the claims would have been settled if they had been filed pursuant to the 2002 TDP
Expected annual claim payments decreased from (estimated) $146.8 million to $87.9 million
Only one-third of the 1995 TDP claims filed in three of the major claim categories met the SOE requirement
A significant number of claims failed to meet the more stringent 2002 medical criteria
Approximately 50% of the 1995 TDP claims were paid at the lowest compensable value; when 2002 TDP criteria were employed, nearly 84% of the claims were paid at the lowest compensable value
Source: David Austern, CRMC, April 6, 2005 ACI Meeting
©Towers Perrin
Asbestos-Related Bills Introduced into the 108th (2003-2004)
Congress:
HR1114 – Kirk (R-IL) – office of Asb. Comp./court
HR1586 – Cannon (R-UT) – court
HR1737 – Dooley (D-CA) – court
S413 – Nickels (R-OK) – court
2 to ban the use of asbestos
HR2277 – Waxman (D-CA)
S1115 – Murray (D-WA)
1 to change the tax code, such that asbestos-related settlement funds would be exempt from tax
HR2503 – Collins (R-GA)
Senate Bill 1125
Introduced May 2003
No Fault System
Initially called for a privately funded trust totaling $108 billion comprised of:
Insurers - $45B
Defendants grouped to tiers based on historical payments
Separated into sub-tiers based on revenues
©Towers Perrin
Insurer funding is net of third party reinsurance
Gross of financial cover
Market share – premium and paid losses
Future exposure – carried reserves
Insurer funding is concentrated
©Towers Perrin
of S1125 – 6/4/2003 Hearing
Tillinghast Projections Released May 2001:
$200B Ultimate Loss & Expense
Equals $130B of 2003+ future payments
Reduced for frictional costs
$61B expected to reach claimants
Conclusion is consistent with RAND: transaction costs have consumed more than half of total spending
©Towers Perrin
of S1125 – 6/4/2003 Hearing
Future claims to be be filed from 2003 - 2049
Pending claims to be re-filed
Initially eight Disease Levels consistent with the Manville 2002 TDP
Specific awards by Disease Level
$0 for Levels I-II to
$750,000 for Level VIII (meso)
Tested various scenarios - all at or below $108B
©Towers Perrin
S1125 passed out Senate Judiciary Committee on
July 10, 2003 (10-8) with significant compromises
Revised medical criteria – 10 Disease Levels
Revised awards ($20,000 for Level II to $1 million for Level X)
Department of Labor to process claims
Unresolved issues:
S2290 was an updated version of S1125
Introduced April 7, 2004
Outcome of S2290
4/22/2004 – Senate did not obtain 60 votes needed to invoke cloture for debate before the full Senate
50 Yea / 47 Nay
5/6/2004 – Further negotiations mediated by Chief Judge Emeritus Edward Becker of the Third Circuit U.S. Court of Appeals ended without agreement
Defendants / Insurers offer $116B + $12B contingency = $128B
Demand by AFL-CIO remains at $134B + $15B contingency = $149B
However, Frist / Daschle continued to work toward a compromise
©Towers Perrin
Compensation levels and projections of claim filings
April 2004 CBO estimate = $140B over 50 years
Daschle late-June proposal of $141B
(+$4B from existing trusts = $145B)
Frist mid-July proposal of $140B
(=$136B + $4B from existing bankruptcy trusts)
September 2004 compromise reached at $140B
NPV differs by ~$4B
Insurers remain at 2003 offer of $46B
©Towers Perrin
Start -Up
Daschle would allow most cases with a trial date to proceed in court
Frist would have all existing claims revert to the fund, except where there has been a final judgment
Lung cancer claims
No finality
©Towers Perrin
State of the Union
January 11, 2005
Discussion draft released January 7, 2005 with “blanks”
Exxon Mobil, DuPont, Federal Mogul and others say they would fare better under existing system
AIA says draft bill “designed to fail”
Group of insurers / defendants say draft “raises serious concerns”
©Towers Perrin
February 2, 2005 Hearing regarding mixed-dust claims and “double-dipping”
Medical experts agreed asbestos v. silica disease can be distinguished
Unlikely an individual would suffer diseases carried by both substances
Early-February Specter delays introduction of bill to garner GOP support, at request of Frist
Late February, describes process as balancing act between Democrats and Republicans, but making progress
March 1, Washington Times “If everyone insists on the last bit of advantage, there will be no bill… Prompt compromises will have to be forthcoming if this critical legislation is to become law or relegated to the deep freeze.”
Frist has reserved time in early April (after 3/18 – 4/4 recess) for Senate consideration
S. Res 43 (H. Reid/Democrat/Nevada) designates April 1, 2005 as “National Asbestos Awareness Day”
©Towers Perrin
State Reform Efforts
Efforts at federal reform have drawn attention to abuses in the current system (e.g., claims by the unimpaired)
Several states aren’t waiting for a federal solution and recently have enacted various reforms
Mississippi
Will Ohio hold, Texas be enforced, ….?
How portable are the claims?
Judicial System Changes
Adequate discovery
Trying cases
©Towers Perrin
Fraudulent Claims
Group 1: 64% positive; Group 2: 95% positive
Re-evaluated 439 cases: only 3.6% positive
Johns Hopkins
Originally >90% positive drops to <5% positive
2/16-18/2005 Silica MDL Daubert Hearings – Judge Jack/Corpus Christi, TX
>50% of 10K MDL claimants previously filed asbestos claims
Doctors testified they weren’t qualified to make diagnoses; didn’t authorize silica diagnoses
Defense attorneys have requested $1.1M sanctions against plaintiff attorneys; subject of 3/14/2005 hearing
Judge Jack likely to remand cases to state court by end of March
Manville Trust - Injury by Year Filed
6%
6%
5%
5%
5%
4%
3%
13%
12%
11%
7%
9%
9%
6%
10%
7%
8%
6%
6%
7%
81%
84%
89%
85%
86%
92%
85%
89%
88%
91%
93%
90%
90%
4%
2%
3%
4%
Non-Malignant
Cancer
Mesothelioma
2
11
4
33
4
2222
0
11
0
3
2
7
10
12
55
1
0
2
4
6
8
10
12
14
198319851987198919911993199519971999200120032005
Number
0
10
20
30
40
50
60
70
80
1994199519961997199819992000200120022003
$ Billions
0
10
20
30
40
50
60
70
80
Estimated Ultimate Cost ($55 - $65 billion)Cumulative Paid ($28.2 billion at 2003)
Outstanding Case & IBNR ($22.2 billion at 2003)
Manville Trust - Injury by Year Filed
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
19901991199219931994199519961997199819992000200120022003
since inception
coverage
companies
coverage
to smaller share of industry
Tier 3: Manufacturers, distributors and
installers brought into litigation due to
Tier 1 and Tier 2 bankruptcies
Lesser exposure due to
encapsulated products or limited
asbestos used and th ird parties
exposed on premises
1930
Calendar Year 1998 - 2003: Ten Largest Increases
-5001,0001,5002,0002,5003,0003,5004,0004,5005,0005,500
Millions