Reinsurers May Be Spared Asbestos Claims

As a result of these increasing trends, A.M. Best has increased its estimate of the industrys ultimate losses for asbestos claims. A.M. Bests new estimate of $65 billion is 62.5 percent higher than its prior best estimate of $40 billion.

At first, the asbestos manufacturers were the primary litigation targets. These manufacturers sought insurance coverage under the product liability section of their general liability policies, and this section typically contained aggregate limits that were eventually exhausted.

With continued asbestos litigation raining down on them and little or no remaining insurance coverage under their product liability policies, the manufacturers exercised several tactics. They sought bankruptcy protection and/or additional insurance coverage under the premise-and-operation section of their general liability policies.

Although there have been numerous bankruptcies of the manufacturers that produced asbestos over the last 20 years, relatively few bankruptcies occurred between 1992 and 1999. However, bankruptcies have increased dramatically in the last 18 months, largely due to the surge of additional asbestos claims.

The following companies filed for bankruptcy in 2000: Owens Corning, Pittsburgh Corning Corp., Armstrong World Industries Inc., McDermott International Inc. (Babcock & Wilcox Company), and Burns & Roe Enterprises Inc. Additionally, W.R. Grace, USG Corp. and G-I Holdings (formerly GAF Corp.) have all filed for bankruptcy protection in 2001.

As the pool of defendants shrinks because of bankruptcy filings, the remaining solvent defendants are targeted to shoulder additional shares of asbestos claimants costs. This has also led to new defendants being named in asbestos litigation (broadening the industry types affected by asbestos claims).

As a result of the increasing claims, the manufacturers and plaintiffs attorneys are also seeking additional coverage by attempting to reclassify claims as non-product related to receive coverage under other sections of their general liability polices (such as coverage for the installation of the products). Additionally, the plaintiffs attorneys are suing more parties. The new defendants include construction companies, installers of asbestos, distributors, and property owners.

This change in coverage and defendants will affect primary insurance coverage more than excess coverage, due to the lack of aggregate limits on premises coverage. (It is easier to spread claims to multiple defendants in multiple years.)

Since these new defendants are not deep pockets and typically do not have large policy limits, we believe that future asbestos claims filings will affect insurance companies more than reinsurers.

The insurance industry is beginning to respond to the increase in asbestos claims, but the response has been slow and not all companies have recognized the increasing trends. Consequently, the industry survival ratio in recent years has fallen. (A survival ratio is the ratio of total reserves to annual paid losses, and therefore represents the number of years of level payments funded by the current carried reserve. The survival ratio is a relative reserve adequacy standard, but is an imprecise measurement.)

Table 2 displays the survival ratios for the top 28 companies with asbestos and environmental liabilities. We have divided the top 28 companies into quartiles, based on year-end 2000 survival ratios. As Table 2 demonstrates, the survival ratios have fallen since 1997 for all groups except for the top quartile, as filed claims have increased.

Therefore, despite some companies taking corrective reserving actions for asbestos, the industrys relative reserve strength is weaker as of year-end 2000 than a few years ago.

Too many companies are operating on a pay-as-you-go basis, whereby the reserves are increased by the amount of loss payments. This strategy will negatively affect earnings in future years as companies add to reserves and it may also disguise some companys true financial condition.

Additionally, A.M. Best believes the industry should have a survival ratio of 12. The ratings agencys May 4, 2001 special report on asbestos said asbestos and environmental payments will continue for at least 20 years.

As a result, "the average industry survival ratio of 8 times is weak and far short of its ultimate funding requirements," the report said.

"The ultimate industry benchmark of 12 times for both asbestos and environmental exposures reflects the net present value of anticipated future industry payouts over the next 20 years with an assumed discount rate of 5 percent," the report continued.

The trends for the insurance industry for asbestos exposures are worsening. The industry asbestos reserves appear well short of ultimate costs, given the surge in the numbers of defendants and related new claims filings.

Due to these trends, we will continue to see the insurance industry strengthen its reserves in order to meet the ultimate cost of asbestos claims. Thus, several companies will experience earnings drag and potential ratings downgrades as future asbestos exposures result in claim payments.

Brian Brown and Lori E. Julga are consulting actuaries in the Milwaukee office of Milliman USA.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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