Asbestos Valuation

CLRS – Chicago; September 8, 2003

Kevin M. Madigan, PhD, ACAS, MAAAVice President, Platinum Underwriters Bermuda, Ltd.

Claus S. Metzner, FSA, FCAS, MAAA, Aktuar – SAVPrincipal and Consulting Actuary, Epic Actuaries, LLC

Asbestos Valuation

What are we faced with?• a large number of claimants• multiple defendants• long latency periods • a number of coverage years• different coverages (products; premises/ops, etc.)• varying policy limits• limited information• complex financial arrangements

What are we to do?

Asbestos Valuation

• Develop techniques to deal with:– A gigantic allocation problem between

• The manufacturer/installer/distributor: the insured• The insurers of the manufacturer, etc• The re-insurer• The retrocessionaire

• Need to obtain/quantify expert knowledge from claim and legal staff to master the problem

Asbestos Valuation

• Step I: The Insured– Develop the “Universe” of claims for each

insured – Consider the type of claim: products versus

premises/operations, etc.– Consider the length of the reporting period– Consider legal costs– Consider inflation (all kinds)– Consider issues of bankruptcy

Asbestos Valuation

• What do we know/what can we find out for Step I?– Historical reporting patterns– Historical frequency and severity– Claim knowledge– Legal knowledge

• Goal: develop a set of assumptions and a model for the projection of the ultimate claims and the allocation to coverage period– Quantifying the “expert knowledge”

Asbestos Valuation

• After we have all the assumptions, how do we model the results ?(the assumptions are developed with the help of claim and legal experts!)– Assumptions are generally not just a best estimate– Assumptions have a distribution, a range, of possible

outcomes– Model on a stochastic basis (note: less than perfect

approximations are useful – the output of the model provides information as to the sensitivity of key assumptions)

Asbestos Valuation

• Step II: The Insurer• Once we have obtained the model output

(note – this is a range of outputs!) can apply coverage charts to obtain the range of ultimate losses – Policy limits important– Primary versus excess– Other special coverage conditions

(manuscript forms)

Asbestos Valuation

• Having developed the range of ultimate losses for each insured, can now subtract the payments to date to obtain a range of reserves for each insured

• Note 1: pay special attention to validation routines on an account by account basis – the “smell test” – using the collective knowledge of claim and legal experts

• Note 2: consider if a covariance adjustment is appropriate – i.e. will everything go bad at the same time? - if no co-variance adjustment is used, the range may be misstated on the high side; if complete independence assumed, the range may be misstated on the low side– Each company’s mix of business by state, by type of insured,

etc. should be considered

Asbestos Valuation

• “Smaller” insureds with reported asbestos claims – some alternatives for the valuation– Use the information gained from the modeling

process for large accounts to group small accounts– Treat each group as if it were a single account and

model– Use a review of emerging claims to assess products

and premises/operations coverage– Use a review of the types of accounts to evaluate

potential impact of policy limits

Asbestos Valuation

• IBNR– A very difficult subject but note the following

• Major asbestos defendants have long since been identified and are presumably already modeled – see Step I

• Minor defendants are emerging - model how many additional accounts may report claims in the future and apply frequency/severity assumptions per account – in the alternative, model number of emerging claims (note that policy limits may not apply – c.f. reinsurance impact)

• Consider where you are on the “reporting” curve• May want to consider issues of “modeling risk” as part of

IBNR

Asbestos Valuation

• Step 3: Assess Reinsurance Recoverable• Reinsurance Program for each coverage/underwriting

year can be applied to each outcome of the ultimate losses to develop a range of reinsurance recoverable consistent with the gross ultimate losses– Consider: dimunition/exhaustion of coverage due to other types

of claims and previous payments– Consider: facultative/treaty/etc.– Consider: what accounts are generating IBNR and will the

emergence of the IBNR claims even trigger reinsurance– Consider: creditworthiness

Asbestos Valuation

• The previous steps have taken us through the process of developing a gross and a net liability for the primary insurer

• Now we come to the re-insurer

Asbestos Valuation

• What are some key differences between the primary insurance valuation problems and the reinsurance valuation problem?– Re-insurer has less information than the cedant– Potentially more heterogeneous book of business– Generally higher attachment points– Generally longer lags until claims are reported– Potential that primary companies’ reserving problems

lead to a (massive) understatement of reinsurance recoverable by primary companies and understatement of re-insurer’s liability

Asbestos Valuation

• Possible remedies for the lack of data– For primary companies representing a large portion of

the exposure, investigate who the major insured accounts were for the years in question – then follow primary process with superimposed reinsurance program

– Adjust reported data for• Perceived reserve inadequacies• For better/worse than average reporting of data

– Quality and timeliness and relative case basis reserve adequacy are important

– Consider the limits profile of the primary company

Asbestos Valuation

• Retrocessionaire Issues– Even less data available– Longer report lags– “Spiral” may be critical – e.g. London Excess

Market

• IBNR very important, but the least amount of information is available

• Consider if the market under review – e.g. LMX – can be viewed as a pool

Asbestos Valuation

• Summary– Key issues

• Long latency period• Multiple coverage years• Complex legal issues• Complex financial structures• Lack of data

Asbestos Valuation

• Summary– Key Approaches

• Gain as much information as possible• Use expertise of claim and legal staff to develop

assumptions• Model results stochastically

– Assumptions are documented– Can measure impact of change in environment as

reflected in revised assumptions

• Use consistent underlying assumptions to model primary, excess, reinsurance layers

Asbestos Valuation

• Summary– Expect to be “surprised”– Keep monitoring and updating– Stay in close contact with claim and legal

professionals