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Asbestos – The Perfect Storm - Casualty Actuarial Society

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					Asbestos – The Perfect Storm
CAS Annual Meeting- Boston
November 11-12, 2002




Michael E. Angelina, ACAS, MAAA – Consulting Actuary
Tillinghast – Towers Perrin
Why So Much Litigation?

 Large percentage of population
  exposed
 Signature diseases

 Potential for large jury awards
 Economies of scale for plaintiff
  attorneys
 Insurance recoverables




                                     2
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
 ...and increasing costs to insurers and reinsurers
   Increased costs for existing defendants
   Additional costs for new defendants
   Additional coverage accessed




                                                       3
Surge in Filings

 Causes
   “catch up” for CCR defendants post Georgine
   acceleration of claim filings
     anticipation of tort reform; bankruptcy creditor lists;
      statute of limitations
   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
     continued ability to bundle claims will drive costs
                                                                4
Change in Disease Mix
                                                              Manville Trust - Injury by Year Filed


                      100,000


                       90,000



                       80,000


                       70,000



                       60,000
   Number of Claims




                                                                                                                             (Denied) or Unknown
                                                                                                                             Non-Malignant
                       50,000
                                                                                                                             Cancer
                                                                                                                             Mesothelioma
                       40,000



                       30,000


                       20,000



                       10,000


                           0
                                1990   1991   1992   1993   1994    1995      1996     1997      1998   1999   2000   2001
                                                                      Year Filed


                                                                                                                                              5
Change in Disease Mix

                                                                            Manville Trust - Injury by Year Filed


                                       100%




                                       80%
 Percent of Claims Filed by Category




                                              77%    82%    83%    89%    85%     86%      91%       84%       89%   87%    91%    93%

                                                                                                                                          Non-Malignant
                                       60%


                                                                                                                                          Cancer


                                       40%
                                                                                                                                          Mesothelioma



                                       20%
                                              13%
                                                      12%
                                                             11%           9%                         10%
                                                                    7%             9%                           7%    8%
                                                                                              6%                             6%
                                              10%                                                                                   4%
                                                      6%     5%     4%     5%      4%                 6%              5%
                                        0%                                                   3%                 4%           3%     2%


                                              1990   1991   1992   1993   1994    1995     1996      1997     1998   1999   2000   2001
                                                                                   Year Filed




                                                                                                                                                          6
Increasing Numbers of Claimants Are Unimpaired

                 4% of claims showed no manifest asbestos-related injury
1982                                   (RAND)

         Up to one-half of all asbestos claims have little or no physical impairment
1993                           (Harvard Journal of Legislation)

                    No evidence of disease in 57% of asbestos claims
1998                                 (Manville Trust)

                          74% of pending claims are unimpaired
                       (confidential report prepared for a defendant)

                   Two-thirds of claims show no evidence of impairment
2001                                (Babcock & Wilcox)

                Vast majority of claims provide no evidence of impairment
                                       (W.R. Grace)

                                                    Source: RAND                 7
Bankruptcy of Defendants

 Currently at least 60 bankruptcies of companies with asbestos-
  related problems according to the December 2001, American
  Academy of Actuaries Public Policy Monograph at www.actuary.org
 Bankruptcy cited as “legislative solution” by Babcock & Wilcox
 New bankruptcies may:
   Increase costs for remaining defendants
       Several defendants cited higher settlement demands as a cause of
        bankruptcy
   Cause need for additional defendants
      Approximately 300 asbestos defendants in early 1980s
      Estimates of ~2,000 published a few years ago
      Over 6,000 today according to RAND



                                                                     8
Number of Bankruptcies per Year


                                        Number of Asbestos Related Bankruptcies

         10
                                                                                                              9
          9

          8
                                                                                                                   7
          7
                                                                                                         6
          6
Number




                                                                                               5
          5
                                   4
          4
               3                        3         3    3              3
          3
                                                            2    2                                  2
          2
                    1    1    1                                                 1    1
          1
                                             0                             0              0
          0
              1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002




                                                                                                                         9
Expansion of Defendant List
 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

 According to RAND Study
   Firms in current list of defendants span 77 of 82 possible 2-digit SIC
    codes/industries
   Over 60% of expenditures are now from non-traditional defendants
                                                                                    10
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




                                                           11
How to Quantify Asbestos Liabilities?

 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 was 7.6 (excluding Fibreboard) as
        of 12/31/2000
      A.M. Best now using a survival ratio of 18.0
    Comparisons to peer companies (e.g., significant reserve
      additions)
         $5 - $10 billion in U.S. insurer reserve additions during 2001
          estimated by Standard & Poors
    Aggregate development
      multiples of paid losses, case reserves, or reported losses
                                                                           12
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
                                                         13
Recent Estimates of Ultimate Liability

 Tillinghast estimates ultimate loss & ALAE relating to
  U.S. exposure will be $200 billion
 Two approaches:
         Top-Down               Focused on amounts
     Focused on total           paid by defendants
      awards to plaintiffs      Assigned defendants
     Estimated # future         to tier
      filings by disease        Estimated # future
     Estimated indemnity        filings, indemnity, and
      cost and trended by        expense by tier
      disease                   Allocated ultimates to
     Loaded for expense         year and compared to
                                 insurance coverage

                                    Bottom-Up
                                                           14
Estimation of Ultimate Personal Injury Claim Filings
   Number of Filings
                       Tillinghast Projection of Asbestos Related Filings




                                          Calendar Year


                                  Meso   Lung Cancer   Non-Malignant
                                                                            15
Estimation of Ultimate Loss and Expense
                   Tillinghast Projection of Asbestos Related Ultimate Losses
 $ Expected Loss




                                           Filed Year

                                    Meso   Lung Cancer   Non-Malignant          16
Allocate Ultimate Loss and Expense
Among Multiple Payers

                                 Defendant
                                   Cost

                                                          Retained

                                  Insured



             Direct –                                     Direct –
              U.S.                                        London



Retained –                                   Retained –
                        Ceded                                        Ceded
   U.S.                                       London




       U.S.             London    Other             U.S.             London   Other




                                                                                  17
Coverage Expansion

 Roll-forward of coverage blocks
 Reclassification of products claims as non-products
  claims by traditional products defendants with
  installation activities with exhausted (or nearly
  exhausted) products coverages
   reinstates previously exhausted products coverages
   opens up previously “untapped” non-products
     coverages
   non-products coverages may not have aggregate
     limits



                                                        18
 Portion of $200 billion Ultimate Loss and Expense – Retained,
 Net Insured U.S., Net Non-U.S.**

                         Net No n -
                            U.S.
                          In su red                                         Ret ai n ed
                            31%                                                 by
                                                                           Def en d an t s
                                                                               39%




                                        Net U.S.
                                        In su red
                                         30%*


*$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.


                                                                                                                   19
Paid and Reported Loss and Expense Compared to Estimates
of Net U.S. Ultimate Liability


             80                                                                                                         80

             70                                                                                                         70

             60                                                                                                         60

             50                                                                                                         50
$ Billions




             40                                                                                                         40

             30                                                                                                         30

             20                                                                                                         20

             10                                                                                                         10

             0                                                                                                          0
                  1994          1995              1996            1997         1998             1999             2000

                  Tillinghast 12/1996 Ultimate ($38-43 billion)          Tillinghast 2001 Ultimate ($55-65 billion)
                  A.M. Best 1997 Ultimate ($40 billion)                  A.M. Best 2001 Ultimate ($65 billion)
                  Cumulative Paid ($22 billion)                          Outstanding Case & IBNR ($10 billion)




                                                                                                                        20
Recent Increases in Recognized Liabilities
In the U.S.:
 Allmerica – $33 million pre-tax per A.M. Best
   (February 2002)
 American Financial – $136 million pre-tax per A.M. Best;
   $81.3 million after tax to cover asbestos, pollution and
   September 11 losses
 CNA – $1 billion pre-tax per A.M. Best; $750 million after
   tax (August 3, 2001)
 ECRA – $1 billion pre-tax estimated by A.M. Best
   (February 2002)
 GE Global – $99 million pre-tax per A.M. Best
   (February 2002)
 Safeco – $70 million pre-tax per A.M. Best
   (February 2002)                                         21
Recent Increases in Recognized Liabilities
And around the world:
 Chester Street
   placed in provisional liquidation (January 2001)
   entered a “Scheme of Arrangement”
    (March 5, 2001)
 Equitas
     £1.5 billion as initially undisclosed portion of total
       strengthening as of March 31, 2000
     £1.7 billion ($2.4 million) as of March 31, 2001
       (announced July 2001)
 Royal & Sun Alliance – $538 million for U.S. and U.K.
  (February 2002)
   U.S. pre-tax charge of $241 million estimated by A.M.
                                                            22
    Best
Where Do We Go From Here?
Recent Changes in Claims Handling

 Asbestos claims handled differently than other torts
   volume/docket pressure
   bundling

 Center for Claims Resolution (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; in run-off
 Equitas leads London insurers, requiring evidence of
  injury and product identification effective June 1, 2001
                                                         23
The Coalition for Asbestos Justice

 Formed in 2000 as a nonprofit association to address and
  improve the asbestos litigation environment
 Currently has eight members: Ace, Argonaut, Chubb, CNA,
  Fireman‟s Fund, The Hartford, Liberty Mutual, and St. Paul
 Mission: To encourage fair and prompt compensation to
  deserving current and future asbestos litigants by seeking
  to reduce or eliminate the abuses and inequities that exist
  under the current civil justice system
 Coalition is not involved with insurance coverage issues

 Working to effect change through public education
  (including the judiciary), amicus briefs, and jurisdictional
  litigation efforts

                                                                 24
Public Education

 A primary mission of the Coalition is to foster a better
   understanding of the current asbestos litigation environment
    Research and Studies (e.g., RAND Study update at
     www.rand.org)
 Academic Scholarship
    Victor E. Schwartz & Leah Lorber, “A Letter to the Nation‟s
     Trial Judges: How the Focus on Efficiency Is Hurting You
     and Innocent Victims in Asbestos Liability Cases” 24 Am. J.
     Trial Advoc. 247 (2000)
    Mark D. Plevin & Paul Kalish, “Where Are They Now? A
     History of the Companies That Have Sought Bankruptcy
     Protection Due to Asbestos Claims” Vol. 1, No. 1 Mealey‟s
     Asbestos Bankr. Rep., Aug. 2001
 “This is NOT your father‟s asbestos defendant”
                                                                   25
Jurisdictional Litigation Efforts

 Identifying jurisdictions that pose the biggest
  challenges for asbestos defendants and truly sick
  claimants
   Key states: CA, IL, LA, MD, MA, MS, NJ, NY, PA,
     TX, WV
 Meeting with counsel from these states to understand
  the current case management orders and identifying
  other due process issues
 Advancing inactive dockets / pleural registries
 Challenging consolidations and joinder rules



                                                         26
Changes in the Wind?

 There are a few signs in the asbestos litigation
  environment that business may not be as usual
   A split in the asbestos plaintiff‟s bar between those
    representing “real” cases versus those representing
    the non-impaired
   Judge Weiner‟s ruling in the Federal MDL
    dismissing all cases that were initiated through
    mass screenings
   Efforts in current bankruptcies to establish medical
    criteria and the consolidation before U.S. District
    Judge Alfred M. Wolin
   Hearing held by Judges Weinstein and Lifland in the
    Johns Manville bankruptcy proceeding
                                                        27
Changes in the Wind?

 There are a few signs in the asbestos litigation
  environment that business may not be as usual
   Judge Pickard‟s ruling in Mississippi that he will no
    longer allow out of state plaintiffs to file suit in
    Mississippi
   Various challenges to the West Virginia mass trial
    scheduled for June 2002
   Pennsylvania Asbestos Litigation (SB 216) dealing
    with asbestos-related liabilities acquired via merger
    or consolidation
   Many more articles in the business press and from
    investment analysts advocating the need for an
    asbestos solution
                                                            28
Recent 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)
 “How Plaintiffs Lawyers Have Turned Asbestos Into a Court Perennial” – The
   Wall Street Journal (March 5, 2001)
 “The Energizer Bunny of Toxic Torts” – Emphasis (First Quarter 2001)
 “Asbestos Claims Surge Set to Dampen Earnings for Commercial Insurers” –
   A.M. Best Special Report (May 7, 2001)
 “Asbestos Litigation in the US: A New Look at an Old Issue”- RAND Institute
   for Civil Justice (August 2001)
 “The $200 Billion Miscarriage of Justice” – Fortune (March 4, 2002)

 “The Asbestos Pit” – Time (March 5, 2002)                                 29
Possible Federal Legislation

 The Fairness in Compensation Act (H.R. 1283/S758) did
  not advance
   would have established the Asbestos Resolution Corp.
   opposed by President Clinton and the plaintiff‟s bar

 Likely prospective proposals supported by the Asbestos
  Alliance (led by the American Insurance Association and
  the National Association of Manufacturers) will focus
  legislation on four areas
   establishing objective medical criteria of asbestos-related
     impairment
   liberalizing statues of limitations
   eliminating consolidations
   eliminating forum shopping

                                                             30
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, numerous defendants have
    declared bankruptcy …)
   “…endless search for a solvent bystander…”
   “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 …”

                                                                                              31
Current Status Recap

 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
 More scrutiny from insurance regulators
                                                           32
Current Status Recap (cont‟d)

 More than 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 ...




                                                      33
Michael E. Angelina
Mr. 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 principal of Tillinghast – Towers
Perrin in its Philadelphia office.

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 assisting clients with asbestos-related
operational strategies. He has quantified reserve needs for asbestos, pollution, and other health hazards (APH) for both domestic
and international insurers and reinsurers. He has also written for Emphasis on asbestos issues, and has participated on various
industry forums, trade press, and meetings regarding asbestos liabilities. Mr. Angelina is also active in the firm‟s placement initiative
for these types of exposures.

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 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, as well as asbestos-related issues. 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 of
Actuaries. Mr. Angelina is a graduate of Drexel University with a B.S. degree in Mathematics.

Angelim@tillinghast.com
(215) 656-2345                                                                                                                 34
Jennifer L. Biggs
Ms. 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 principal of
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. Under her direction as Chairperson of the American Academy of Actuaries Mass Tort Work
Group a Public Policy Monograph: Overview of Asbestos Issues and Trends was released in December 2001.

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.

Biggsj@tillinghast.com
(314) 719-5843


                                                                                                                     35

				
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