Concurrent Session: Asbestos Claims LiabilitiesQuantification of Asbestos Liabilities

Jennifer L. Biggs, FCAS, MAAAConsulting ActuaryTillinghast – Towers Perrin

2001 CAS Annual MeetingNovember 13-14, 2001Atlanta, Georgia

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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

Increase settlement amounts with remaining defendants

Increase number of defendants

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…and Increasing Costs to Insurers and Reinsurers

Increased costs for existing defendants Additional costs for new defendants Additional coverage accessed

Roll-forward of initial coverage blocks Products reclassification

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Products Reclassification Asbestos claims have traditionally been filed under the

products coverage of GL policies Two courts have ruled that non-products GL coverage may

apply to claims against installation contractors Frontier Insulation Contractors, Inc. v. Merchants Mutual

Ins. Co., 667 N.Y.S. 2d 982 (N.Y. Ct. App. 1997) Commercial Union Ins. Co. v. Porter Hayden Co., 698

A.2d 1167 Md. Ct. Spec. App. 1997) Now, traditional products defendants with installation

activities with exhausted (or nearly exhausted) products coverage are attempting to obtain additional insurance coverage by reclassifying claims (that were previously paid under products limits) as operations claims.

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Premises / Operations Coverage If reclassification successful

Reinstates portion of previously exhausted products limits

Provides additional limits under premises/ operations coverage

Limits on premises/operations coverage? Generally doesn’t have aggregate limit May reflect aggregate limit if subject to

Wellington

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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

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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)

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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

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Estimates of the “Universe”

SourceTillinghast

Net U.S. Insurer/ReinsurerUltimate Loss & ALAE

$38 – $43 billionDate

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

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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 2001 Ultimate ($55.0-65.0 billion)A.M. Best 2001 Ultimate ($65.0 billion)Cumulative Paid

Outstanding (Case & IBNR)

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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 expense

F = # 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

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Estimation of Ultimate Personal Injury Claim FilingsTillinghast Projection of Number of Asbestos Related Filings

1995

- 199

9

2000

- 200

4

2005

- 200

9

2010

- 201

4

2015

- 201

9

2020

- 202

4

2025

- 202

9

2030

- 203

4

2035

- 203

9

2040

- 204

4

2045

- 204

9

Calendar Year

Num

ber o

f Fili

ngs

Meso Lung Cancer Non-Malignant

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Estimation of Ultimate Loss and ExpenseTillinghast Projection of Asbestos Related Ultimate Losses

1995

- 19

9920

00 -

2004

2005

- 20

0920

10 -

2014

2015

- 20

1920

20 -

2024

2025

- 20

2920

30 -

2034

2035

- 20

3920

40 -

2044

2045

- 20

49

Filed Year

$ Ex

pect

ed L

oss

Meso Lung Cancer Non-Malignant

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Allocate Ultimate Loss and ExpenseAmong 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

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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.

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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 DefendantsTier 1: Manufacturer/producers in litigation

since 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

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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.

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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

Cov

erag

e A

mou

nt $

Primary

Excess 1

Excess 2

Excess 3

Excess 4

Excess 5

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

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More Detailed Coverage Descriptionof Excess 1 Layer in 1980

0

2

4

6

8

1980

$ M

illio

ns

Excess 1 70% Insurer GHI

Excess 1 10% Insurer ABC

Excess 2

Excess 110%

InsurerABC

Excess 120%

InsurerDEF

Excess 170%

InsurerGHI

Primary - Insurer JKL

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Comparison of Loss Allocated to 1980to Available Coverage of Insurer ABC For example, 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

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Why So Much Litigation? Large percentage of population

exposed Signature diseases Potential for large jury awards Economies of scale for plaintiff

attorneys Insurance recoverables

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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 eight defendants have declared bankruptcy …)

In November 2000, “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 …”

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The Cry for Solutions Dismissal of the Georgine and Fibreboard settlements

Georgine restricts the application of Rule 23 – asbestos “class” too diverse

Fibreboard places new restrictions on limited fund class actions

In both cases, the Supreme Court cries for a legislative solution

Attempts to establish the Asbestos Resolution Corp. – 2000 bills (HR1283 / S758) make little progress (stalled in committee)

Bankruptcy cited as a “legislative solution” by B&W Expect more bankruptcies

Tax Relief (2001: HR1412) Finite reinsurance deals or LPTs

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Changes on the Horizon Asbestos defendants fight back

G-I Holdings files civil racketeering suit against three plaintiff law firms (January 2001)

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 Asbestos defendants file suits against several tobacco firms

Manville Trust “Falise” mistrial (January 2001); suit dropped (June 2001)

Mississippi case dismissed – Owens Corning to appeal (May 2001) Insurers also fight

Connecticut Supreme Court rules for insurers and against Met Life (January 2001)

Equitas leads London insurers, requiring evidence of injury and product identification effective June 1, 2001

The Coalition for Asbestos Justice

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Jennifer L. BiggsMs. 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. She recently assumed the role of Chairperson of the American Academy of Actuaries Mass Tort Work Group which has created a primer on asbestos issues for policy-makers.

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.

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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.

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 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. He has also written for Emphasis on asbestos issues, and has participated on various industry forums and meetings regarding asbestos liabilities. Mr. Angelina is also active in the firm’s placement initiative for these exposures.

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. 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.