A.M. Best Report: Asbestos Claims Surge Set to Dampen Earnings

May 21, 2001

The property/casualty industry may be facing a surge in asbestos claims that could cumulatively cost the industry as much as $65 billion. This new estimate of ultimate asbestos-related losses is nearly two-thirds higher than A.M. Best’s previous 1997 estimate of $40 billion for such costs.

Meanwhile, A.M. Best’s estimate of the industry’s ultimate environmental liabilities remains unchanged at $56 billion, pending further study later in the year. As a result, A.M. Best projects that the industry’s ultimate A&E losses are now expected to reach $121 billion, up 26% from A.M. Best’s previous $96 billion estimate.

Key findings
Asbestos has surpassed environmental to become the most significant and difficult mass tort issue for the property/casualty industry in terms of incurred losses to date, claims volume and ultimate dollar exposure.

Based on Footnote 27 data, the insurance industry’s asbestos claims payments have increased dramatically, averaging nearly 15% during the past two years. Over the next three to five years, we expect this unfavorable pay-ment trend to worsen, with paid claims increasing at least 20% annually. With asbestos-claim payments expected to grow for the majority of exposed insurers in 2001 and beyond, these trends portend significant future asbestos liabilities and earnings drag for the P/C industry for years to come.

Based on year-end 2000 data, A.M. Best projects that the industry is underfunded by roughly $33 billion, relative to its ultimate asbestos liability. While these claims will emerge over the next 10 to 20 years, A.M. Best expects that there will be a surge in indemnity and defense costs over the next three to five years as plaintiff’s attorneys rush to file claims before any potential federal legislation limiting such claims is enacted. Thereafter, payments will likely flatten and eventually begin to decline.

A.M. Best projects that the asbestos earnings drag on the commercial lines and reinsurance segments of the property/casualty industry will increase from 1.5 points in 2000 to close to 2.0 points over the mid-term, assuming insurers maintain a “pay as you go” funding strategy. More importantly though, the industry earnings drag will prove to be even higher as companies are compelled by third-party pressure to more fully fund their exposures.

The impact on certain individual insurers and reinsurers is anticipated to be significantly greater, especially for companies that need to “clean-up” their balance sheets in connection with M&A transactions. Some insurers were significantly impacted by asbestos liabilities and have reported as much as a 15-point increase in their combined ratio in 2000.

A.M. Best expects that the top 30 asbestos-exposed insurers that have borne the majority of the industry’s historical costs will continue to absorb between 80% to 90% of future asbestos losses. The top 30 insurers will likely bear over 90% of the costs associated with a concentrated number of manufacturers and installers, most of whom have recently filed for bankruptcy. Meanwhile, more midsize insurers will be drawn into suits that involve peripheral defendants, including a mix of manufacturers, distributors, installers and others.

Except for three stand-alone run-off insurers (Home, Philadelphia Re and Reliance), the top 30 asbestos-exposed insurers appear financially stable, and will not likely become impaired by the new surge in asbestos claims. However, the top 30 groups will experience roughly 1.0 to 4.0 points of asbestos earnings drag, that will otherwise dampen commercial insurers’ efforts to achieve respectable operating returns following several years of fierce price competition in the market.

The industry is expected to fund these liabilities on a “pay as you go” basis until recent loss trends become more established over the next year or two. Thereafter, A.M. Best expects that insurance companies will be in a better position to assess their ultimate asbestos liabilities through “ground-up” exposure modeling, and thus respond to A.M. Best’s increased scrutiny.

Meanwhile, a legislative solution to asbestos claim litigation is being pursued by some insurers and major corporate defendants. The hoped-for tort reform would apply a more streamlined, less litigious administrative process to the multitude of asbestos cases. However, any timely resolution will require the support of the members of the plaintiffs bar which has exhibited an increased appetite for soliciting new claimants.

A.M. Best will publish its more detailed 2001 study on the Property/Casualty industry’s asbestos and environmental liabilities later this summer. Individual insurers’ A&E reserve and paid loss data (from their year-end 2000 statutory filings) will be included in an appendix to that report.

Asbestos tidal surge expected
While asbestos materials have not been produced in this country since the early 1970s, the fallout from its mining and use in virtually every facet of American industry continues to haunt present-day corporations and insurers alike. A.M. Best’s $25 billion upward revision in asbestos losses is a reflection of the recent explosion in claim filings against a wide-range of defendants.

A key driver of this explosion is the accelera-tion of bankruptcy filings by major asbestos producers seeking relief from rapidly escalating asbestos claims. As increasing numbers of producers opt for federal bankruptcy protection, remaining defendants are targeted to shoulder larger shares of asbestos costs. In addition, a growing number of peripheral defendants are now being caught up in litigation as plaintiff’s attorneys seek to recoup settlements “lost” to producers now in bankruptcy.

Other drivers impacting the asbestos front include the threat of policy reclassification, whereby previously settled product liability claims are reclassified under other areas of the general liability policy (thereby reopening formerly exhausted product liability aggregate policy limits to additional claims), maturation of the more serious and more expensive-to-treat illnesses (mesothelioma), and an increase in the number of new plaintiff’s attorneys targeting asbestos liabilities cases.

As a result, A.M. Best believes that the proper-ty/casualty industry should brace itself for an onslaught of new claims.

Asbestos emerges as difficult mass tort
The property/casualty industry raced to estab-lish adequate A&E reserves during the mid-1990s in response to growing concerns from regula-tors, A.M. Best and other constituencies. As the issue du jour, the level of reserve strengthening was sometimes seen as a competitive marketing tool with some groups trumpeting their financial flexibility to set aside A&E reserves so as to put these losses behind them once and for all. At the time, it was widely believed that environmental exposures would far outpace asbestos claims.The latter was expected to stabilize and eventually decline in relative importance by the end of the 1990s.

Unfortunately, the reverse has occurred due to company bankruptcies (which have served to encourage attorneys to target additional defendants), the recent disintegration of the last major payment scheme previously agreed to by many of the significant parties involved, and the maturation of the long latency period of dis-eases associated with asbestos material.

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