Asbestos: A Moving Target.

Asbestos losses and expenses that U.S. insurers will incur are much more than predicted a few years ago due to social, legal and economic changes.

Asbestos is one of the most mature mass torts, with litigation to date spanning over 30 years. In spite of this, projecting the financial responsibility that will fall on the shoulders of the asbestos defendants, and the insurance companies that have provided insurance support to them, is a problem fraught with uncertainty. This is chiefly because the social, legal and economic environment under which individual asbestos claimants are being compensated is changing continuously.

The authors estimate the ultimate cost of asbestos claims, including legal expenses, to be $275 billion, with $70 billion estimated to be paid by U.S. insurers under general liability coverage, $30 billion by non-U.S. insurers, and $175 billion uninsured.

The increased focus on asbestos liability is not surprising. During 2000 and the first half of 2001, there has been a significant increase in the expectation of future payments for the defendants involved in asbestos litigation and the insurance companies that provided insurance coverage to them.

The number of filings made against a number of defendants more than doubled in 2000 as compared to previous years. As an example, the number of claims filed against the Manville Trust increased from 29,000 in 1999 to 58,000 in 2000, with an additional 51,000 filed in the first six months of 2001 alone. The Manville Trust was formed in 1988 to settle asbestos personal-injury claims resulting from exposure to products mined or manufactured by the JohnsManvile Corp.

* As the resources available to compensate claimants have been depleted due to bankruptcies of defendants, the cost of compensating claimants is being shifted to others. Plaintiff lawyers, in an effort to procure full value for their clients, have been demanding increases in contributions from the solvent companies, and have also cast their net wider to include new defendants. Indeed, the defendant pool has increased to more than 2,400 companies from a level of 300 in the mid-1980s.

Devastated Companies

The sharp increase in filings and the cost shifting that have occurred recently have had a devastating impact on the U.S. companies that manufactured, distributed or had some connection with asbestos, as well as on their insurers and reinsurers worldwide.

Eight companies mired in asbestos litigation have declared bankruptcy in 2000 and the first half of 2001, asserting that the court system has ceased to make a fair determination of their asbestos-related liability and that any legislative solution appears unlikely.

Responding to the increase in expectation of future asbestos losses, Equitas, the company set up to run off Lloyd's pre-1993 liabilities, has strengthened its gross undiscounted provision for asbestos claims by $2.5 billion as of March 2001, following an increase of similar magnitude the previous year. Likewise, CNA has increased its net asbestos reserves by $600 million since year-end 2000. More insurance companies are likely to follow suit.

Ultimate Losses

The authors' estimate of the property and casualty insurance industry's ultimate losses and expenses for asbestos claims is approximately $100 billion; $95 billion for bodily injury claims and $5 billion for property damage claims. The authors further estimate that the $100 billion in insurer payments will be split $70 billion for U.S. insurers (including U.S. insurance companies that have foreign parents) and $30 billion for non-U.S. insurers. In addition, it is projected that approximately $175 billion will be the responsibility of the underlying defendants.

These estimates of $70 billion and $30 billion in ultimate losses and expenses for U.S. and non-U.S. insurers result in unpaid loss and expense estimates of approximately $48 billion and $22 billion, respectively A.M. Best Co. reports that U.S. insurers have paid $22 billion in loss and expense and have an estimated $10 billion in reserves as of year-end 2000, an amount $38 billion lower than this estimate of the unpaid amount. While the authors do not have similar published figures for non-U.S. insurers, they estimate the cumulative paid loss and expense to be approximately $7 billion to $10 billion.

These estimates are significantly higher than estimates made by many experts just a few years ago. This increase is chiefly due to the following reasons:

* Individual defendants have experienced significant increases in both the number of claims filed and their average payment per claim, increases far beyond those projected a few years ago.

* The defendant pool has increased, increasing the potential insurance limits available for asbestos losses.

* A number of manufacturers and distributors of asbestos products owned subsidiaries that installed asbestos products. The first route of coverage for asbestos defendants was products liability, where the exposure to insurers is limited by aggregate limits. As these asbestos defendants are exhausting their product-liability limits they are seeking premises and operations coverage for claims related to their installation activities, claiming the exposure to the claimants occurred during the actual installation rather than from the completed product. Since premises and operations coverage generally does not have aggregate limits, significant additional coverage could be available if the defendants are successful in this reclassification. The impact of this will be greatest on companies that wrote primary policies; reinsurers and insurance companies that wrote excess policies are likely to be somewhat insulated.

When projecting the future payments for asbestos claims, four important considerations are the number of claims expected to be filed in the future, the average paid loss per claim, the expenses that would be incurred by the defendants and the mix of claimants by disease type.

Projecting Future Filings

To date, over half a million filings have been made against asbestos defendants. The authors estimate that the ultimate number of filings will approximate 1.1 million, more than twice the filings made to date.(See "Number of Asbestos Filings by Year," at right.) This projection is considerably lower than the nearly 2 million filings that the Manville Trust is currently expecting.

The number of claims filed in recent years has increased for a number of defendants, far beyond the level expected by most, if not all, analysts. Many believe that this increase is a result of an acceleration of claim filings due to the recent bankruptcies and an attempt by plaintiff attorneys to file claims before any reform legislation is enacted by Congress. There is some truth to this assertion. Whenever a bankruptcy occurs, a bar date is set by the court, a deadline by which all claims must be filed against the debtor so that the debtor is able to define a universe of known valid claims. This often results in an increase in filings for all defendants because the lawyers discover that the claimants were exposed to products made or distributed by other manufacturers during their investigation.

The above argument may lead one to believe that the high level of filings observed currently is temporary, and that the number of filings should, therefore, revert to lower levels. However, there are more fundamental causes at play that indicate the increases observed are likely to continue into the future.

First, part of the reason that the number of claims filed in recent years appears high compared to the number expected is that the expected filings were based on estimates of the total population exposed to asbestos that were likely too low. In the late '80s and early '90s, many experts believed that the total number of workers exposed to asbestos (including deceased) was in the neighborhood of 28 million. In fact, when the Manville Trust completed its first study at the time of the Johns-Manville Corp. bankruptcy, the number of workers exposed to asbestos was assumed to be 18 million to 20 million. The Manville Trust now believes that the exposed population is in excess of 80 million. Indeed, if workers from the industries that are believed to be exposed to asbestos but have not yet filed claims against the Manville Trust are included, the exposed population, according to the Manville Trust, is in excess of 100 million.

Second, there is increased awareness among claimants regarding the asbestos-litigation environment now as compared to several years ago. As a result, there is a higher chance than in the past that people exposed to asbestos will sue.

Third, the Center for Claims Resolution (formed by a group of 21 asbestos defendants in the late 1980s), in an effort to make up for the tort system's inability to handle the large number of claims filed each year, settled claims in bulk before they went to court. In a perverse twist of fate, some believe that the center may have encouraged lawyers to file unmeritorious claims as a result.

In estimating the future filings, the authors have given some weight to the possibility that the higher-than-expected level of filings observed in 2000 and the first half of 2001 may be partially caused by an acceleration in filings due to bankruptcies, and that this increased level will not necessarily continue. The authors have, however, projected considerably more future filings than in their previous analysis, in recognition of the belief that more people are exposed to asbestos than previously thought and the changes in the environment described above.

The authors also have assumed that, in the future, defendants and insurers will require that claimants meet stricter standards (e.g., satisfy certain medical criteria) in order to receive payment. Furthermore, as the focus shifts to peripheral defendants, the likelihood of achieving large punitive damage awards decreases, which may result in plaintiff attorneys pursuing these claims with less vigor. Both of these factors would reduce the number of claims filed.

Projecting the Average Loss

There are a number of factors that cause the average cost of asbestos claims to change over time.

When evaluating the future losses for an individual defendant, it is important to realize that, as companies became bankrupt, in an effort to obtain reasonable compensation for their clients, plaintiff lawyers have increased their settlement demands of the solvent asbestos defendants and have expanded the defendant pool. This does not mean that the claimants will receive more for their claims, just that there is cost shifting in terms of who will be compensating them. Babcock & Wilcox, immediately prior to declaring bankruptcy, saw settlement demands go up by 50% and sometimes even 400% over the amounts previously paid for comparable claims.

Implicit in this selection of average loss per claim is the assumption that, as the companies that have gone bankrupt recently (and those that may go bankrupt in the future) pay less, there will always be other defendants that will fill the gap. It is quite possible that as more and more companies become bankrupt, the average settlement values may actually go down because it may become difficult to find deep pockets in the future. If this were to happen, this would likely reduce the uninsured portion from the $175 billion estimated, but it would not likely reduce the insured amount.

Furthermore, in an effort to improve efficiency, courts have allowed aggregation of claims. Aggregation has allowed the grouping of unimpaired claimants with the impaired claimants, increasing the awards for unimpaired claimants by virtue of the sympathy factor that flows due to association with the truly sick.

Aggregation also has allowed the migration of claims to venues that are friendly to plaintiffs. For example, at the end of 2000, approximately 16% of the open cases of one asbestos defendant reviewed are pending in Mississippi, a forum that is considered sympathetic to plaintiffs, although the number of plaintiffs who lived or worked in Mississippi is a mere fraction of 16%.

Expenses

The authors have estimated legal expenses for defendants will approximate a third of loss payments overall. This relationship varies widely by defendant, with actual paid expense to loss ratios ranging from less than 10% for some defendants to more than 1,000% for others. The authors believe that these expenses (as a percentage of loss) have declined over the years, and this assumption is reflected here. The legal expenses considered include the legal costs associated with defending lawsuits and participating in settlement negotiations and the costs associated with coverage disputes between insurers and their insureds.

Mix by Diseases

Several diseases have been linked to asbestos exposure, ranging from mesothelioma, the most severe of injuries, to pleural injuries, which are nonmalignant. Many defendants and insurance companies have asserted that the majority of the claimants that are being compensated are not currently impaired. The authors have assumed in these projections that stricter standards for evaluating claims will be implemented in the future, eliminating some of the payments made to unimpaired claimants.

Projections of future claim filings and the compensation paid to the claimants vary by disease type, with mesothelioma claimants being paid at a level that is approximately 30 times that for nonmalignant claims. (See "Effect of Specific Diseases;" left.)

Raji Bhagavatula, Rebecca Moody and Jason Russ are consulting actuaries with Milliman USA, New York.

Number of Asbestos Filings by Year
More than 500,000 filings have been made against asbestos defendants.
Fillings are projected to total 1.1 million.
Pre-'90  140,000
'90-'94   90,000
'95-'99  170,000
'00-'04  270,000
'05-'09  135,000
'10-'14  110,000
'15-'19   75,000
'20-'24   50,000
'25-'29   30,000
'30-'34   15,000
'35-'39   10,000
'40-'44    5,000
'45-'49    1,000
Note: Table made from bar graph
Effect of Specific Diseases
The following charts illustrate the mix of the 1.1 million projected
asbestos claims and the total projected loss and expense for bodily
injury claims ($265 billion out of the $275 billion total estimate)
by disease type:
               Filings  Costs
Non-Malignant      88%    33%
Other Cancer        5%  55.5%
Lung Cancer       5.5%    10%
Mesothelioma      1.5%   1.5%
Note: Table made from pie chart