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					NEW CLASSES OF CLAIMS / MEGATORT UPDATE

Casualty Actuarial Society Annual Meeting – Concurrent Session
November 13, 2000




Moderator / Panelist:
Jennifer L. Biggs, FCAS, MAAA
Consulting Actuary
Tillinghast – Towers Perrin
Introduction

 Panelists

   Jenni Biggs — Consulting Actuary / Tillinghast–
     Towers Perrin

   Phil Miller — Consulting Actuary / Tillinghast–
     Towers Perrin

   Barbara Murray — Assistant Vice President /
     Argonaut Insurance Company




                                                      2
Agenda

 Discussion of the status of specific torts
   Asbestos
   Pollution
   Tobacco
   Other Megatorts
 Determining the coverage chart and financial
  exposure.




                                                 3
Asbestos: Headlines

 ―Asbestos & Environmental Losses Nearly Doubled in
  ‗99‖ – BestWeek (July 10, 2000)
 ―Asbestos Claims Still Killing‖ – The Economist
  (August 19, 2000)
 ―Equitas significantly increases reserves for asbestos
  liabilities‖ – The Review (September 4, 2000)
 ―Insurer Asbestos Woes Grow‖ – National Underwriter
  (October 16, 2000)
 ―Asbestos Claims Increasing; P/C Reserve Additions
  Expected‖ – Best‘s Viewpoint (October 25, 2000)


                                                           4
Asbestos: Notable Defendant Activity

 Three major bankruptcies during 2000
   McDermott (Babcock and Wilcox) – February 2000
   Pittsburgh Corning – April 2000
   Owens Corning Fibreglas – October 2000
 Significant charges to earnings for asbestos claims
   Owens Corning Fibreglas – $1.42 billion (1998)
   Armstrong – $345 million (January 2000)
   Owens Illinois – $550 million (October 2000)




                                                        5
Asbestos: Background

 ―Miracle Mineral‖
   flexible            fire resistant
   strong              separable into filaments
   durable             abundant quantities
 Usage
   Usage peaked in early 1970s; virtually eliminated in
    the early 1980s.
   Exposure and use limits not established in the U.S.
    until 1970s
   EPA ban on most forms of asbestos in 1989
   Asbestos still used today in the U.S. in several
    products
                                                           6
Asbestos: Background (cont‘d)

 Exposure
   By 1980, 14 million living U.S. workers had
    experienced significant occupational exposure
   Ongoing exposure to asbestos-in-place
   Typical American breathes ~1 million fibers per year
    via natural and man-made sources
 Disease
   Recognized as cause of disease since 1920s
   Long latency
   Pleural thickening, asbestosis, lung and other
    cancers, mesothelioma

                                                       7
Asbestos: Background (cont‘d)

 Why so much litigation?
   Signature disease
   Large percentage of population
    exposed
   Potential for large jury awards
   Economies of scale for plaintiff
    attorneys
   Insurance recoverables




                                       8
Asbestos: Current Status

 Increased cost to defendants, their insurers, and
  reinsurers
   Surge in claim filings
   Bankruptcies
   Increase in settlement amounts
   Increase in number of defendants
   Roll-forward of initial blocks
   Rescission of previous settlement agreements
   Products reclassification




                                                      9
 Asbestos:
 Claim Filings Appeared Fairly Stable in Early 1990s


              50.0


              40.0
(Thousands)




              30.0


              20.0


              10.0


               0.0
                     1991       1992           1993        1994         1995

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



                                                                               10
Asbestos: Prior Defendant Activity

 Generally level filing patterns
   some surges in various jurisdictions (MS, TX)
      driven by mass consolidations, tort reform
   bouquet approach
      routinely bundle severe claims (meso/cancer)    with
        high frequency non-malignants for settlement
 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
                                                        11
Asbestos: Settlements by Disease




   Countrywide      State 1             State 2             State 3

             Mesothelioma     Lung Cancer   Non Malignant

                                                                      12
   Asbestos:
   CCR Claims Filings Increased in Late 1990s

              90.0
              80.0
              70.0
(Thousands)




              60.0
              50.0
              40.0
              30.0
              20.0
              10.0
               0.0
                     1991     1992   1993     1994   1995   1996   1997   1998    1999

                            Avg CCR1(91-95)      CCR 1      Avg CCR2(91-95)      CCR 2



                                                                                         13
   Asbestos: Non-CCR Claim Filings Also Increased


              50.0

              40.0
(Thousands)




              30.0

              20.0

              10.0

               0.0
                     1991   1992   1993   1994   1995   1996   1997   1998   1999

                                   Avg 91-94     Non-CCR 1       Non-CCR 2

                                                                                    14
   Asbestos: Average Annual Claim Filings

              70.0

              60.0

              50.0
(Thousands)




              40.0

              30.0

              20.0

              10.0

               0.0
                     1991-93    1993-95          1996-97       1998-99

                               Non-CCR Filings   CCR Filings



                                                                         15
Asbestos: Surge in Filings

 Causes
   Tort reform accelerating time frame for claim filings
      implies fewer filings later on
   ―catch up‖ for CCR defendants post Georgine
   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
                                                            16
Asbestos: Change in Disease Mix


Distribution of Filings by             Distribution of Filings by
      disease (1994)                        disease (1998)




  Meso   Lung Cancer   Non Malignant



                                            Meso   Lung Cancer Non Malignant




                                                                               17
Asbestos: Bankruptcy of Defendants

 Currently 25 bankruptcies of companies with asbestos-related
  problems
   Began in early 1980s (Johns Manville – 1982)
   Approximately 20 by early 1990s (National Gypsum – 1992)
   Virtually no activity from 1992 – 1999
   Three bankruptcies in 2000 (Babcock & Wilcox, Pittsburgh
     Corning, Owens Corning Fibreglas)
 Defendants cited higher settlement demands as a cause of
  bankruptcy
 New bankruptcies may
   Increase costs for remaining defendants
   Cause need for additional defendants

                                                           18
Asbestos: Expansion of Defendant List

 Approximately 300 asbestos defendants in 1980s; several
  thousand today
 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                     19
Asbestos: The Cry for Solutions

 Dismissal of Fibreboard settlement
   places new restrictions on limited fund class actions
   cries for legislative solution
 HR1283 / S758 to establish Asbestos Resolution Corp.
 Bankruptcy cited as a ―legislative solution‖ by Babcock &
  Wilcox
   Expect more bankruptcies
 Late 2000 – tried to insert an asbestos bailout plan into
  final tax bill
 Coalition for Asbestos Justice
 Also expect more finite deals
 May see increased scrutiny of financials
                                                            20
Asbestos: Defendants Seek Additional Coverage

 Roll-forward of initial coverage blocks
 Rescission of previous settlement agreements

 Products reclassification




                                                 21
Asbestos: Products Reclassification

 Asbestos claims have traditionally been filed under the
  products coverage of CGL policies
 Two courts have ruled that non-products unaggregated GL
  coverage applies to claims against insulation contractors
 Now, traditional products defendants with insulation
  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 premises/operations.




                                                            22
Asbestos: 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




                                                           23
Asbestos: 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.‖
   ―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.‖

                                                                                 24
      Asbestos: Estimates of the ―Universe‖


Source        Net U.S. Ultimate Loss & ALAE                    Comments
Tillinghast          $38 – $43 billion                   Tillinghast 12/96 Estimate.
                                                           Currently under review.



Source        Net U.S. Ultimate Loss & ALAE                    Comments
A.M. Best               $40 billion                       From 1997 A&E Study.
                                              A.M. Best speculates that its $40 billion estimate
                                                   might be understated by 25% to 50%.




                                                                                               25
Asbestos: Paid and Reported Loss and Expense Compared to
Estimates of Net U.S. Ultimate Liability

               70                                                                                                      70


               60                                                                                                      60


               50                                                                                                      50


               40                                                                                                      40
  $ Billions




               30                                                                                                      30


               20                                                                                                      20


               10                                                                                                      10


                0                                                                                                      0
                    1994                 1995          1996                1997                      1998       1999


                           Cumulative Paid                    Tillinghast Ultimate ($38.0-43.0 billion)

                           Outstanding (Case & IBNR)          A.M. Best Updated Ultimate ($50.0-60.0 billion)

                                                              A.M. Best Ultimate ($40.0 billion)




                                                                                                                           26
Asbestos: Around the World

              Largest Producers, 1996                                Largest Consumers, 1994
                  (in metric tons)                                        (in metric tons)


                                                    Russia & other former Soviet
    Russia                                720,000                                                 700,000
                                                              republics


   Canada                       521,000                                   China         220,000



    China            250,000                                              Brazil       190,000



 Kazakstan          225,000                                            Thailand       164,000



     Brazil      170,000                                                   India    123,000



                 165,000                                           South Korea     85,000
Zimbabw e


                                                                            Iran   65,000




                                                                                                    27
Asbestos: Around the World

 World production has declined significantly since 1973
   1973 approximately 5.1 million metric tons
   1996 approximately 2.3 million metric tons

 In past two decades, consumption has increased
  dramatically in many developing countries
                      Consumption
                     (in metric tons)

                   1970             1994   Growth
      Thailand    21,000         164,000     781%
      India       51,000         123,000     241%




                                                       28
Asbestos: In Developing Countries
   Consumption has increased but safety precautions have not been
    implemented.
   Why the increase?
     low cost
     high quality
     immediate health benefits for the consumer
     suited to the economics of poor countries
   Why the lack of safety precautions?
     Lack of awareness
     apathetic governments
   Implications:
     According to epidemiologist Julian Peto, the surge in use ―will result in
       several million cancer deaths over the next 30 years‖
     By comparison, over past 30 years USA has had 171,500 premature
       asbestos-related cancer deaths


                                                                                  29
Asbestos: In Europe

 European Union banned amphibole types of asbestos
  in 1991. Chrysotile banned 9/27/99; to be fully
  implemented by 1/1/2005.
 Belgium — claims filed under workers compensation
  system
 France — asbestos use prohibited effective 1/1/1997

 Italy — asbestos use prohibited in 1992
   claims to be paid by The Italian National Security
     (INAIL), employers (compulsory EL coverage), and
     insurers
 Netherlands — 1997/1998 creation of the Institute for
  Asbestosis
                                                          30
Pollution: Headlines

 A.M. Best:
   Environmental losses are tracking as expected
   Stable claim trends
   Lower than expected site clean-up costs
   Absence of new sites on the National Priorities List




                                                           31
Pollution: What Underlies the Stable Trends

 Very slow growth in the number of sites on the
  National Priorities List
 No dramatic changes in the coverage case
  precedents, thereby encouraging settlements
 Ongoing settlement activity has stabilized payment
  levels
 Risk based corrective action
 Greater PRP participation in site remediation –
  incentive to reduce / control costs



                                                       32
      Pollution: Estimates of the ―Universe‖


Source        Net U.S. Ultimate Loss & ALAE                     Comments
Tillinghast          $30 – $40 billion                         Current Estimate




Source        Net U.S. Ultimate Loss & ALAE                     Comments
A.M. Best               $56 billion                          From 1997 A&E Study.
                                              A.M. Best believes that its environmental estimate
                                              is still reasonably accurate, if not somewhat on the
                                                                conservative side.




                                                                                                33
Pollution: Paid and Reported Loss and Expense Compared to
Estimates of Net U.S. Ultimate Liability

                70                                                                                                                    70


                60                                                                                                                    60


                50                                                                                                                    50
   $ Billions




                40                                                                                                                    40


                30                                                                                                                    30


                20                                                                                                                    20


                10                                                                                                                    10


                0                                                                                                                     0
                             1994           1995          1996              1997              1998             1999

          Cumulative Paid   Outstanding (Case & IBNR)   Tillinghast Ultimate ($30.0-40.0 billion)    A.M. Best Ultimate ($56.0 billion)




                                                                                                                                     34

				
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