NEW CLASSES OF CLAIMS / MEGATORT UPDATE

Moderator / Panelist:

Jennifer L. Biggs, FCAS, MAAA

Consulting Actuary

Tillinghast – Towers Perrin

Casualty Actuarial Society Annual Meeting – Concurrent SessionNovember 13, 2000

2

Introduction

Panelists

Jenni Biggs — Consulting Actuary / Tillinghast–Towers Perrin

Phil Miller — Consulting Actuary / Tillinghast–Towers Perrin

Barbara Murray — Assistant Vice President / Argonaut Insurance Company

3

Agenda

Discussion of the status of specific torts Asbestos Pollution Tobacco Other Megatorts

Determining the coverage chart and financial exposure.

4

Asbestos: Headlines

“Asbestos & Environmental Losses Nearly Doubled in ‘99” – BestWeek (July 10, 2000)

“Asbestos Claims Still Killing” – The Economist (August 19, 2000)

“Equitas significantly increases reserves for asbestos liabilities” – The Review (September 4, 2000)

“Insurer Asbestos Woes Grow” – National Underwriter (October 16, 2000)

“Asbestos Claims Increasing; P/C Reserve Additions Expected” – Best’s Viewpoint (October 25, 2000)

5

Asbestos: Notable Defendant Activity

Three major bankruptcies during 2000 McDermott (Babcock and Wilcox) – February

2000 Pittsburgh Corning – April 2000 Owens Corning Fibreglas – October 2000

Significant charges to earnings for asbestos claims Owens Corning Fibreglas – $1.42 billion

(1998) Armstrong – $345 million (January 2000) Owens Illinois – $550 million (October 2000)

6

Asbestos: Background

“Miracle Mineral”

Usage Usage peaked in early 1970s; virtually

eliminated in the early 1980s. Exposure and use limits not established in the

U.S. until 1970s EPA ban on most forms of asbestos in 1989 Asbestos still used today in the U.S. in several

products

flexible strong durable

fire resistant separable into

filaments abundant quantities

7

Asbestos: Background (cont’d)

Exposure By 1980, 14 million living U.S. workers had

experienced significant occupational exposure

Ongoing exposure to asbestos-in-place Typical American breathes ~1 million fibers

per year via natural and man-made sources

Disease Recognized as cause of disease since 1920s Long latency Pleural thickening, asbestosis, lung and other

cancers, mesothelioma

8

Asbestos: Background (cont’d)

Why so much litigation? Signature disease Large percentage of population

exposed Potential for large jury awards Economies of scale for plaintiff

attorneys Insurance recoverables

9

Asbestos: Current Status

Increased cost to defendants, their insurers, and reinsurers Surge in claim filings Bankruptcies Increase in settlement amounts Increase in number of defendants Roll-forward of initial blocks Rescission of previous settlement agreements Products reclassification

10

Asbestos: Claim Filings Appeared Fairly Stable in Early 1990s

0.0

10.0

20.0

30.0

40.0

50.0

1991 1992 1993 1994 1995

CCR 1 CCR 2 Non-CCR 1 Non-CCR 2

(Thousa

nds)

11

Asbestos: Prior Defendant Activity

Generally level filing patterns some surges in various jurisdictions (MS, TX)

driven by mass consolidations, tort reform bouquet approach

routinely bundle severe claims (meso/cancer) with high frequency non-malignants for settlement

Settlements vary by disease and jurisdiction little variation by attorney some upward trend on settlement amounts

Outside legal defense costs as a percentage of indemnity have decreased relative to prior levels

12

Asbestos: Settlements by Disease

Countrywide State 1 State 2 State 3

Mesothelioma Lung Cancer Non Malignant

13

Asbestos:CCR Claims Filings Increased in Late 1990s

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1991 1992 1993 1994 1995 1996 1997 1998 1999

Avg CCR1(91-95) CCR 1 Avg CCR2(91-95) CCR 2

(Thousa

nds)

14

Asbestos: Non-CCR Claim Filings Also Increased(T

housa

nds)

0.0

10.0

20.0

30.0

40.0

50.0

1991 1992 1993 1994 1995 1996 1997 1998 1999

Avg 91-94 Non-CCR 1 Non-CCR 2

15

Asbestos: Average Annual Claim Filings

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1991-93 1993-95 1996-97 1998-99

Non-CCR Filings CCR Filings

(Thousa

nds)

16

Asbestos: Surge in Filings

Causes Tort reform accelerating time frame for claim

filings implies fewer filings later on

“catch up” for CCR defendants post Georgine aggressive plaintiff attorneys

asbestos specialty firms, union hall screenings, Sunday sports page advertisements, Internet, doctors, new claims

Effects Increased costs to all parties!!

change in disease mix mitigates the increase

17

Asbestos: Change in Disease Mix

Distribution of Filings by disease (1998)

Meso Lung CancerNon Malignant

Distribution of Filings by disease (1994)

Meso Lung Cancer Non Malignant

18

Asbestos: Bankruptcy of Defendants

Currently 25 bankruptcies of companies with asbestos-related problems Began in early 1980s (Johns Manville – 1982) Approximately 20 by early 1990s (National Gypsum –

1992) Virtually no activity from 1992 – 1999 Three bankruptcies in 2000 (Babcock & Wilcox,

Pittsburgh Corning, Owens Corning Fibreglas) Defendants cited higher settlement demands as a cause

of bankruptcy New bankruptcies may

Increase costs for remaining defendants Cause need for additional defendants

19

Asbestos: Expansion of Defendant List

Approximately 300 asbestos defendants in 1980s; several thousand today

Defendant list continues to expand since asbestos was used historically in a wide variety of products, including: yarn, thread, felt, rope packing, flame resistant cloth steam gaskets and packings, plain and corrugated paper,

rollboard, millboard, high temperature insulation, movie props World War II Ship Building molded brake linings, brake blocks, filler in plastics, flooring,

pottery, insulated wire, pipe covering brake shoes, clutch facings, cement, plaster, stucco, shingles,

siding, tile, sewer pipes, blocks corrugated roofing, roof sheathing, roofing cement boiler insulation; insulation of walls, floors, mattresses paints, varnishes, filter fibers, filter pads

20

Asbestos: The Cry for Solutions

Dismissal of Fibreboard settlement places new restrictions on limited fund class actions cries for legislative solution

HR1283 / S758 to establish Asbestos Resolution Corp. Bankruptcy cited as a “legislative solution” by Babcock

& Wilcox Expect more bankruptcies

Late 2000 – tried to insert an asbestos bailout plan into final tax bill

Coalition for Asbestos Justice Also expect more finite deals May see increased scrutiny of financials

21

Asbestos: Defendants Seek Additional Coverage

Roll-forward of initial coverage blocks

Rescission of previous settlement agreements

Products reclassification

22

Asbestos: Products Reclassification

Asbestos claims have traditionally been filed under the products coverage of CGL policies

Two courts have ruled that non-products unaggregated GL coverage applies to claims against insulation contractors

Now, traditional products defendants with insulation activities with exhausted (or nearly exhausted) products coverage are attempting to obtain additional insurance coverage by reclassifying claims that were previously paid under products limits as premises/operations.

23

Asbestos: Premises / Operations Coverage

If reclassification successful reinstates portion of previously exhausted

products limits provides additional limits under

premises/operations coverage

Limits on premises/operations coverage? generally doesn’t have aggregate limit may reflect aggregate limit if subject to

Wellington

24

Asbestos: Quotes from Clients and Colleagues

“The claims are continuing”

“We have more open accounts today then we did ten years ago. We’re seeing more claims against Main Street America – distributions, hardware, HVAC.”

“Claim filings have remained steady; we expected a decrease by now.”

“Asbestos is the energizer bunny of toxic torts; it keeps going and going and going...”

“We are seeing operations claims from new defendants (contractors, distributors)”

We’ve been approached by producers seeking finite cover. The cover might be a positive influence on financial analyst opinions … The defendants must anticipate that filings will continue … A small number of deals are being done.”

“I expect to see at least five more bankruptcies of asbestos defendants in the next 12 to 18 months.”

“The life of HR1283 hinges upon the outcome of the presidential election.”

“Asbestos litigation is a profit-driven industry.”

“Don’t think of them as lawyers, think of them as venture capitalists.”

25

Asbestos: Estimates of the “Universe”

SourceTillinghast

Net U.S. Ultimate Loss & ALAE$38 – $43 billion

Comments Tillinghast 12/96 Estimate.

Currently under review.

SourceA.M. Best

Net U.S. Ultimate Loss & ALAE $40 billion

Comments From 1997 A&E Study.

A.M. Best speculates that its $40 billion estimatemight be understated by 25% to 50%.

26

Asbestos: Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability

0

10

20

30

40

50

60

70

1994 1995 1996 1997 1998 1999

$ B

illi

on

s

0

10

20

30

40

50

60

70

Tillinghast Ultimate ($38.0-43.0 billion)

A.M. Best Ultimate ($40.0 billion)

A.M. Best Updated Ultimate ($50.0-60.0 billion)

Cumulative Paid

Outstanding (Case & IBNR)

27

Asbestos: Around the World

165,000

170,000

225,000

250,000

521,000

720,000

Zimbabwe

Brazil

Kazakstan

China

Canada

Russia

65,000

85,000

123,000

164,000

190,000

220,000

700,000

Iran

South Korea

India

Thailand

Brazil

China

Russia & other former Sovietrepublics

Largest Producers, 1996(in metric tons)

Largest Consumers, 1994(in metric tons)

28

Asbestos: Around the World

World production has declined significantly since 1973 1973 approximately 5.1 million metric tons 1996 approximately 2.3 million metric tons

In past two decades, consumption has increased dramatically in many developing countries

Consumption(in metric tons)

1970 1994 Growth

Thailand 21,000 164,000 781%

India 51,000 123,000 241%

29

Asbestos: In Developing Countries

Consumption has increased but safety precautions have not been implemented.

Why the increase? low cost high quality immediate health benefits for the consumer suited to the economics of poor countries

Why the lack of safety precautions? Lack of awareness apathetic governments

Implications: According to epidemiologist Julian Peto, the surge in use “will

result in several million cancer deaths over the next 30 years” By comparison, over past 30 years USA has had 171,500

premature asbestos-related cancer deaths

30

Asbestos: In Europe

European Union banned amphibole types of asbestos in 1991. Chrysotile banned 9/27/99; to be fully implemented by 1/1/2005.

Belgium — claims filed under workers compensation system

France — asbestos use prohibited effective 1/1/1997

Italy — asbestos use prohibited in 1992 claims to be paid by The Italian National Security

(INAIL), employers (compulsory EL coverage), and insurers

Netherlands — 1997/1998 creation of the Institute for Asbestosis

31

Pollution: Headlines

A.M. Best: Environmental losses are tracking as

expected Stable claim trends Lower than expected site clean-up costs Absence of new sites on the National

Priorities List

32

Pollution: What Underlies the Stable Trends

Very slow growth in the number of sites on the National Priorities List

No dramatic changes in the coverage case precedents, thereby encouraging settlements

Ongoing settlement activity has stabilized payment levels

Risk based corrective action

Greater PRP participation in site remediation – incentive to reduce / control costs

33

Pollution: Estimates of the “Universe”

SourceTillinghast

Net U.S. Ultimate Loss & ALAE$30 – $40 billion

Comments Current Estimate

SourceA.M. Best

Net U.S. Ultimate Loss & ALAE$56 billion

Comments From 1997 A&E Study.

A.M. Best believes that its environmental estimate is still reasonably accurate, if not somewhat on the

conservative side.

34

Pollution: Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability

0

10

20

30

40

50

60

70

1994 1995 1996 1997 1998 1999

$ B

illi

on

s

0

10

20

30

40

50

60

70

Tillinghast Ultimate ($30.0-40.0 billion) A.M. Best Ultimate ($56.0 billion)Cumulative Paid Outstanding (Case & IBNR)