A.M. Best: Asbestos Settlement Won’t Aid Ratings

May 15, 2003

Recent reports of a national, privately financed trust to pay asbestos claimants have raised questions about the insurance industry’s ability to fund its participation in a trust while maintaining individual financial strength ratings.

Because the proposed settlement is broadly in line with A.M. Best’s estimate of the property/casualty insurance industry’s ultimate asbestos liability, and any funding shortfall is already incorporated into A.M. Best’s analysis of individual insurers’ capital strength, ratings are unlikely to change if the settlement is approved, unless individual insurers’ funding shares differ materially from their historic market share.

Lawmakers, unions, insurers and companies that manufactured asbestos or used it in their products are participating in negotiations to establish a $90 billion to $120 billion trust to pay claims over the next 25 years that would ultimately pay out more due to investment earnings. Insurers would likely fund half of any proposed trust.

Because of escalating loss trends, A.M. Best revised its estimate of the U.S. insurance industry’s ultimate undiscounted asbestos liability to $65 billion in May 2001 and is benchmarking insurers’ reserves against the industry’s unpaid portion of that figure based on their historic market share.

At year-end 2002, the industry reported $19 billion of net asbestos reserves, and A.M. Best estimates an additional $20 billion of unfunded liabilities. This $39 billion of remaining asbestos exposure comes close to the industry’s potential contribution to the proposed settlement and is explicitly incorporated into A.M. Best’s evaluation of insurers’ capital adequacy.

A.M. Best’s industry aggregate asbestos estimates do not include the liability of companies that do not file U.S. statutory statements. Thus, A.M. Best’s estimate of the U.S. industry’s remaining liability is moderately less than the median proposed insurance industry contribution to a trust fund which includes non U.S. exposure.

However, from a rating perspective, asbestos liability exposure has been factored into the ratings and capital adequacy of selected non U.S. insurers.

A comprehensive settlement of asbestos liabilities is appealing to insurers as it would define the limits of this uncertain issue. However, details of the trust need to be worked out. On the one hand, the unresolved issues could affect cash flow and may leave the obvious question unanswered, “What happens if the trust runs out of money before all injured parties are paid.”

On the other hand, the recent spate of asbestos reserve charges has diminished the industry’s unfunded liability, and fewer participants would need to take material charges upon the implementation of a national settlement.

A.M. Best will continue to evaluate the adequacy of insurers’ asbestos reserves while monitoring the development of a national trust.

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