UK Scottish Insurers May Take An Asbestos Hit, Moody's Warns

NU Online News Service, Jan.18, 3:29 p.m. EST

A new Scottish court decision means insurers with exposure in the United Kingdom Scottish market face potentially elevated asbestos claims costs, which is a credit negative, Moody's Investors Service said.

That analysis in the rating service's Weekly Credit Outlook from Moody's analyst David Masters followed a Jan. 8 legal ruling by Scotland's Court of Session rejecting an appeal by four European insurers.

Carriers had argued that certain asbestos-related illnesses should not be covered under existing property and casualty insurance policies.

The four insurers involved in the case--Aviva, Axa, RSA and Zurich--brought their action in the wake of the 2009 Damages (Asbestos-related Conditions) (Scotland) Act.

That measure reversed the 2007 Rothwell ruling in the UK's House of Lords that pleural plaques (small areas of fibrosis found in the lung and diaphragm caused by asbestos) were not something, in isolation, for which employees could claim compensation under Employers' Liability (Workers' Comp) insurance.

Mr. Masters wrote that the ruling, which insurers plan to appeal, potentially allows claimants who have yet to suffer any form of physical damage from pleural plaques to lodge claims under insurance policies, and additionally increases the likelihood that existing claims will be settled through payment.

Asbestos-related claims costs, he noted, "are notoriously difficult to estimate, and consequently the current range of estimates is extremely broad. The Scottish Government estimated an annual cost of approximately ?5.5 million to ?6.5 million ($9 million to $10.1 million) in June 2008, a figure which differs wildly from the insurance industry's estimates of an annual cost of up to ?607 million ($991 million) and a cumulative cost of up to ?8.6 billion ($2.6 billion) (on a present value basis).

Mr. Masters wrote that the upper estimates are an unlikely scenario, but noted that the number and magnitude of U.S. asbestos claims has increased over time.

According to Moody's analysis, while the immediate credit implications for UK insurers from the ruling are not material, "there remains a risk that pleural plaques claims could spiral over the longer term."

Mr. Masters could not gauge whether the insurers' appeal of the ruling might be successful.

The outlook said the ultimate credit impact on the insurance industry by the asbestos ruling is complicated by further issues.

It mentioned that a significant proportion of claims would likely relate to exposures at former state-owned enterprises and thus the burden could be borne by both the public and private (insurance) sectors.

Also, Moody's said the ruling only affects Scotland, with Scottish claimants now able to pursue claims, unlike their English and Welsh counterparts, and the firm expects "that a unified approach could ultimately be adopted across the UK. Clearly, were such claims allowed within the UK as a whole, claims costs could increase several-fold."

Insurers, Moody's noted, have not yet disclosed their likely claims costs as a result of this ruling, although we would expect those insurers with significant commercial insurance portfolios in the UK to be amongst the worst affected, at least on a gross basis (i.e., before reinsurance protection is factored in).

While only four insurers appealed the Damages Act, Moody's said it considers the UK property and casualty insurance sector to be well diversified, both at the time when insurance cover for the asbestos exposures were written and currently.

"Therefore, the burden of any future claims would likely be spread across numerous insurers," Mr. Masters wrote.