A.M. Best Co. expects the property/casualty industry to incur upwards of $121 billion in net asbestos and environmental losses, according to the company’s special report, “Final Data Support A.M. Best’s Projection of A&E Reserve Shortfall,” released Nov. 5.
The outlook is consistent with estimates A.M. Best released Oct. 26, 2000, and May 7, 2001. In May, the company increased its estimates of ultimate asbestos losses to $65 billion, up from the 1997 estimate of $40 billion, while leaving the $56 billion environmental estimate unchanged, pending further analysis later this year.
A.M. Best’s proprietary data, when combined with data disclosed under the National Association of Insurance Commissioners’ Note 27 requirements, affirms the opinion that commercial insurers remain significantly underfunded by almost 50 percent, with regard to reserves for ultimate, undiscounted A&E liabilities. Based on the negative outlook as well as year-end data, A.M. Best projects the industry’s unfunded asbestos position at roughly $33 billion, with the environmental exposures underfunded by about $24 billion.
Additional insurer asbestos liabilities are anticipated to materialize due to the convergence of a number of recent and unfavorable developments:
* Acceleration in the number of asbestos defendant bankruptcies.
* Spreading of asbestos-related litigation to peripheral defendants.
* Reopening (in some cases) previously exhausted product liability limits, as policyholders seek to reclassify older claims under the non-products portion of their general liability policies.
* Recent peaking of more serious asbestos-linked illnesses, resulting in higher medical costs.
To the extent that insurers’ reserve shortfalls are significant compared with surplus and potential earnings – especially given the current economic climate – some insurers may find their A.M. Best ratings under downward pressure.
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