Casualty Actuarial SocietySeminar on ReinsuranceConcurrent Session: Current EventsChanges in Asbestos Liability

June 15-16, 2000

Jennifer L. Biggs, FCAS, MAAA

Tillinghast – Towers Perrin

2

Asbestos Liability

Asbestos is not a done deal

Filings are continuing

Unanticipated changes will affect insurer and reinsurer liabilities

3

Asbestos Liability

Some History…

What’s Happening Today?

General Observations in the U.S.

Around the World

4

What is Asbestos?

Naturally occurring fibrous mineral with a crystalline structure, containing long chains of silicon and oxygen flexible strong durable fire resistant separable into filaments

5

Types of asbestos

Six types amphibole types

actinolite amosite (brown asbestos) anthophylite crocidolite (blue asbestos) tremolite

serpentine fiber chrysotile (white asbestos)

Chrysotile: 90% of asbestos production; 95% of asbestos in place in U.S. buildings; thought to be less dangerous than amphibole types.

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Products containing asbestos

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

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Asbestos Usage:

Peak of ~1 million tons of asbestos used in the U.S. in 1973

Exposure and use limits not established in the U.S. until the creation of OSHA in 1970

EPA issued ban on most forms of asbestos in 1989

Asbestos is still used today in several products, including: U.S. Navy submarines chlorine production Space shuttle jointing and gaskets; asphalt coats and sealants some paper, plastics, cement piping, roofing and

shingles

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Cause of Disease

Occupational Exposure

Recognized as a cause of disease since 1920s; universally accepted since 1930s

Long latency: 10-25 years or more

Typical American breathes ~1 million fibers per year via natural and man-made sources

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Types of Diseases

Plueral plaques

Asbestosis

Lung & other cancers

Mesothelioma

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Initial Litigation

First suit filed in Beaumont, TX in 1966

Lawyer won $79,000 in second case in 1969

Landmark case: Borel v. Fibreboard filed 1970; decided 1973

March 1980 TX jury awarded $2.6M to widow of insulation worker

By October 1981 evident that U.S. Courts maximizing insurance coverage for asbestos producers

By 1982, producers began declaring bankruptcy

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Bankruptcies / Limited Trusts / Other Settlements

More than 15 asbestos defendants now bankrupt

National Gypsum filed bankruptcy in 1993 expecting $2.3B in claims trust funded with only $138M from National Gypsum and $380M from

insurers

$4.5B Dow Corning bankruptcy plan approved 12/1999 (SBI)

Babcock & Wilcox filed bankruptcy 2/22/2000 due to demands for higher settlements in asbestos claims 45,000 claims pending

Owens Corning established National Settlement Program (NSP) in 12/1998 resolved 90% of pending claims (176,000); average $4,600 per claim established fixed payments for future claims without litigation private agreement between OCF and plaintiffs counsel (~100 firms)

requires no court approval plaintiffs lawyers promise to hold off on filing new claims until 2001

(catch up on backlog)

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Wellington Agreement

Signed 6/19/1985 after 3 years of negotiation by 34 former asbestos producers and 16 insurers

Established Asbestos Claims Facility (ACF) private, non-profit corporation funded through insurance

proceeds provide efficient, equitable, predictable alternative to the tort

system to file and evaluate asbestos-related bodily injury claims

reduce legal expenses settled insurance coverage disputes cost-share formula based on each producer’s previous

litigation experience

Wellington agreement benefits primary insurers more than reinsurers

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Center for Claims Resolution (CCR)

Withdrawal from ACF triggered by disagreements regarding allocation of claims emergence of new defendants

Establish CCR 10/1988 with more flexible allocation formula and more aggressive settlement philosophy; votes weighted based on share of liability

CCR members are defendants only (no insurers)

Like the ACF, the CCR provided claims handling services, systems support, allocates costs for settlement and bills insurers

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Georgine v. Amchem v. Admiral

CCR Futures Deal proposed settlement to Georgine case $1.3B settlement regarding worldwide exposure of 20

companies allows opt-outs

Dismissed 6/27/1997 absentee interests (i.e., future claimants) inadequately

represented fails to satisfy requirement of adequacy of representation by

named plaintiffs resulted in flood of new claims against CCR companies

Court calls for legislative solution Ginsburg: “… a nationwide administrative claims processing

regime would provide the most secure, fair, and efficient means of compensating victims of asbestos exposure… Congress, however, has not adopted such a solution.”

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Fibreboard

Ahearn; Ortiz v. Fibreboard

1993: $1.535B settlement of 186,000 pending plus future asbestos personal injury claims against Fibreboard

1993: Trilateral Agreement - $2B back-up plan funded by insurers in case global settlement not approved CNA: Continental Casualty Chubb: Pacific Indemnity

Fifth Circuit and Court of Appeals approved class certification on a “limited fund” rationale

Settlement ultimately rejected excluded some potential plaintiffs fairness of distribution conflicting interest of class court should have given more consideration to Fibreboard’s financial condition

ability to pay potential insurance funds

Dismissal places new restrictions on limited-fund class actions; expected to result in more bankruptcies

Court again calls to Congress for a solution

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Proposed Legislation

Establish Asbestos Resolution Corp. pros: unclog court system, expedite process, more victims get

compensation quickly, weed out bogus claims (plaintiffs not sick, or illness not caused by asbestos), eliminate state statute of limitations, 25% cap on fees to plaintiff’s lawyers, set up “Office of Asbestos Compensation” for out of court settlements

cons: unreasonable medical criteria deny thousands from making claims, unfairly caps damage amounts, actually takes longer than court system to compensate, can’t collect punitive damages

House and Senate bills: Fairness in Compensation Act HR1283 approved by House Judiciary Committee by 18-15 vote on

3/16/2000. S758 (introduced March 1999) currently in Senate Judiciary

Committee Supported by “Coalition for Asbestos Resolution” led by GAF Corp.

GAF spent >$7.1M paying >35 lobbyists since 1997 Opposed by the White House, Association of Trial Lawyers of

America, AFL-CIO, Owens Corning

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Lawyers’ Activities

Asbestos specialty firms

Canvassing unions; surge of non-malignant claims

Routinely bundle severe claims with non-malignant claims for settlement

New Claims Household exposure claims Second Injury Claims Medical Monitoring Claims

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Texas / Mississippi

Texas Prior to 1997 suits from out of state were limited, with the

exception of those pertaining to railroads, airlines, and asbestos

Since 1997, annual number of filings in Texas has declined, but not as much as expected

Mississippi offers procedural advantages:

juries rarely rule against the plaintiff defendant doesn’t have right to perform medical exams no provision for class actions, but able to join large groups

of individuals with very different claims, and settlements of individual cases don’t require approval by a judge and aren’t made part of the public court process

can add claimants to a suit with no relation to the state, but with similar injuries

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Rate of Filing (in 000s)

Asbestos Defendant:

#1 #2 #3 #4 #5 #61991 19.0 13.1 19.9

1992 19.0 20.0 19.9 29.1

1993 20.0 26.9 19.6 24.5

1994 12.0 14.0 24.0 21.7

1995 15.0 13.0 32.4 23.4

1996 13.5 28.0 30.9 40.0

1997 5.0 23.5 27.0 40.8 29.8 30.9

1998 7.0 80.0 21.0 62.1 24.0 93.5

1999 12.0 48.0 26.9 51.0 30.7 43.1

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Losses from Note 27

Adverse Asbestos Development by Year (Net)U.S. P/C Insurers

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1993 1994 1995 1996 1997 1998

Calendar Year

Incu

rre

d L

oss

& L

AE

(In

$M

illi

on

s)

*excludes Fibreboard

21

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Optimistic Expected Conservative

Asb

est

os

Lia

bil

ity

($B

illi

on

s)

Unfunded

Recognized

38.0

40.5

43.0

Losses from Note 27

Asbestos Liabilities Current Funding LevelUS Insurance Industry – Net

Based on Tillinghast Estimates

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Recognition and Disclosure

Rating Agencies

Regulators

SEC

BODs

Investment Analysts

Banks

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Top Ten Asbestos Reserve Additions — 1998

0 50 100 150 200 250

CNA Ins Companies

Prudential of Am Grp

GE Global Ins Group

CGU Group

Allstate Ins Group

Amer Intern Group

Allianz of America

CIGNA Group

Amer Financial Group

Travelers PC Group

$ Millions

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Asbestos reserve development has been somewhat concentrated

Cumulative Adverse Asbestos Developmentsince 1993 (Net)

0

2,000

4,000

6,000

8,000

10,000

12,000

1994 1995 1996 1997 1998

Calendar Year

Incu

rre

d L

oss

& L

AE

(In

$M

illi

on

s)

Top 20

All Other

All Groups

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Asbestos reserves relative to surplusby size group

Net Asbestos Reserve as Percentage of SurplusGroups with Footnote 26 Disclosures

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1996 1997 1998

Calendar Year Ending

Top 20

All Other

All Groups

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Asbestos reserves relative to total reservesby size group

Ratio of Net Asbestos Reserves to Total Net ReservesGroups with Footnote 26 Disclosures

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1996 1997 1998

Calendar Year Ending

Top 20

All Other

All Groups

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Asbestos drag on combined ratio by size group

Impact on Combined RatiosRatio of Net Asbestos Incurred to Net Earned Premium

Groups with Footnote 26 Disclosures

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1996 1997 1998

Calendar Year Ending

Top 20

All Other

All Groups

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What’s Happening Today?

Continued emergence of peripheral defendants

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 CGL policies some property damage: concentrated for a few

manufacturers some premises: Tillinghast’s “Tier 4” defendants

Two courts have ruled that non-products unaggregated GL coverage applies to claims against insulation contractors

Now, traditional products defendants with insulation activities that have exhausted products coverage are attempting to obtain additional insurance coverage by reclassifying claims that were previously paid under products limits as premises/operations.

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Products Reclassification

If reclassification successful reinstate portion of previously exhausted

products limits make available premises/operations coverage

Limits on premises/operations coverage? Premises/operations coverage generally

doesn’t have aggregate limit may reflect aggregate limit if subject to

Wellington

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Asbestos Problem/Potential Solutions

Asbestos Problem for Insurers

large underlying cost

many exposed policies

judicial climate favoring plaintiffs

Potential Solutions

Reinsurance Placements T&N

Restructuring Equitas CIGNA

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Quotes from Clients

“The claims are continuing”

“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.”

“Asbestos litigation is a profit-driven industry.”

“Don’t think of them as lawyers, think of them as venture capitalists.”

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Asbestos around the World

165,000

170,000

225,000

250,000

521,000

720,000

Zimbabwe

Brazil

Kazakstan

China

Canada

Russia

65,000

85,000

123,000

164,000

190,000

220,000

700,000

Iran

South Korea

India

Thailand

Brazil

China

Russia & other former Sovietrepublics

Largest Producers, 1996(in metric tons)

Largest Consumers, 1994(in metric tons)

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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%

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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

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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

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Current Events: Asbestos Liability

Changes in Asbestos Liability: Have recent court decisions and procedural changes altered the number and type of claims, as well as the way in which they are presented to insurers and reinsurers?

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Bibliography

A.M. Best Note 27 Data

Alleman, James E. and Mossman, Brooke T., “Asbestos Revisited,” Scientific American, July 1997, p. 70.

“As the Asbestos Crumbles,” Hofstra Law Review, Summer, 1992, 20 Hofstra L. Rev. 1139.

Borel v. Fibreboard, United States Court of Appeals for the Fifth Circuit, No. 72-1492, September 10, 1973.

Bouska, Amy S. and Cross, Susan L., “A Mass Tort or a Mass of Torts?” Emphasis, 1997/3, p. 10.

Bouska, Amy S. and Miller, Philip D., “The ‘Loser’ – and Still Champion?” Emphasis, 1999/2, p. 2.

Broderick, Kathryn P., Kay, Kenneth R., and Stirn, James R., “A Bad Deal for Reinsurers,” Best’s Review, January 1989, p. 42.

Bryant, Arthur H. and Bueckner, Leslie A., “Commentary,” Mealey’s Litigation Report: Asbestos, 7/16/99, Vol. 14, #12, p. 32.

Cauchon, Dennis, “The Asbestos Epidemic (4 Part Series), USA Today, February 9, 1999.

Cauchon, Dennis, “The Asbestos Epidemic (4 Part Series), USA Today, February 11, 1999.

Centola, Gary D., “Commentary,” Mealey’s Litigation Report: Asbestos, 8/6/99, Vol. 14, #13, p. 39.

Chalasani, Radhika, “The Asbestos Epidemic (4 Part Series), USA Today, February 8, 1999.

Cross, Susan L. and Doucette, John P., “Measurement of Asbestos Bodily Injury Liabilities,” Proceedings of the Casualty Actuarial Society, 1997, Vol. LXXXIV, p. 187.

“Despite State Tort Reform, Asbestos Litigation Thrives,” Texas Journal, October 27, 1999.

Dew, Ted, “Will Lead Poison U.S. Insurers,” Emphasis, 1997/2, p. 10.

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Bibliography

http://congress.nw.dc.us/cqi-bin/thomassearch.pl?dir=congressorg2&term=asbestos

Labaton, Stephen, “How a Company Lets Its Cash Talk,” The New York Times/Money & Business, October 17, 1999.

Mealey’s Litigation Report: Asbestos

7/7/1997, Vol. 12, #1

5/1/1998, Vol. 13, #7, p. 12.

5/7/1999, Vol. 14, #7, p. 23.

8/6/1999, Vol. 14, #13, p. 33.

3/17/2000, Vol.15, #4, p. 6.

5/5/2000, Vol. 15, #7, p. 14.

and various other volumes

Morello, Carol, “The Asbestos Epidemic (4 Part Series), USA Today, February 10, 1999.

Ortiz v. Fibreboard, United States Supreme Court No. 97-1704, Decided June 23, 1999.

Vandehei, Jim, “Asbestos – Claims Bill Battle Heats Up with Attack on GOP Legislative Backers,” The Wall Street Journal, February 22, 2000, p. B32.

Warren, Susan, “Asbestos Suits Target Makers of Wine, Cars, Soups, Soaps,” The Wall Street Journal, April 12, 2000.

Werder, Jr., Richard I., “Commentary,” Mealey’s Litigation Report: Asbestos, 9/3/99, Vol. 14, #15, p. 30.