Actuaries Told: Asbestos Claims, Settlement Demands Surge as Bankruptcies Grow

Increased claim filings, awards to unimpaired plaintiffs, bankruptcies and significant reserve additions by insurers are key issues in the mass of litigation surrounding asbestos liabilities, a recent session at the Casualty Actuarial Society’s Seminar on Ratemaking was told.

Jennifer Biggs, a principal of the Tillinghast business of Towers Perrin, an actuarial consulting firm, said that the asbestos litigation environment has changed, increasing costs to defendants due to the surge in claim filings, elevated settlement demands against individual defendants and the growing number of asbestos-related bankruptcies.

Insurers and reinsurers are also facing increasing costs because of the higher costs for existing defendants, additional costs for new defendants and the accessibility of additional coverage, she observed.

“The number of claim filings remains at an all-time high, most brought by people who are not impaired. This is adding to the financial stress on defendant companies, many of which have filed for bankruptcy. This is an important issue for insurance companies as these higher costs lead them to post significant increases to reserve levels. As long as the insurance industry is there to pay for the awards, the plaintiffs’ attorneys have the incentive to keep going out and recruiting plaintiffs,” Biggs said.

She presented statistics from RAND showing that increasing numbers of asbestos claimants are unimpaired. In 1982 only 4 percent of claims did not show manifest asbestos-related injury, in contrast to 2001 when some two-thirds of claims relate to people who are not impaired.

“With most of the non-malignant claims being brought on behalf of people who are not impaired, the number of claimants is more a function of the recruitment efforts of plaintiff attorneys than of exposure and disease. It is difficult to assess how large the potential plaintiff population might be and the number of plaintiff attorney firms is not contracting. The problem is still growing,” Biggs continued.

Damages paid by many individual defendants have also risen sharply, driven by an increase in plaintiff awards and higher shares of those awards going to remaining solvent defendants, according to Biggs.

RAND estimates show that from 1998 to 2001, average verdicts to plaintiffs in mesothelioma cases rose to $6.5 million from $2 million, other cancer awards rose to $2.5 million from $1 million, while asbestosis awards grew to $5 million from $2.5 million.

Asbestos-related problems have reportedly forced at least 72 companies to file for bankruptcy, based on a comparison of the lists maintained by RAND, the American Academy of Actuaries and the Asbestos Alliance.

The accelerating level of bankruptcies is increasing costs for the remaining defendants as it means that there are fewer defendants to share the awards, Biggs noted. New bankruptcies create the need for additional defendants, a list that has grown to over 8,400 today, from just 300 in the early 1980s.

Biggs also commented that the nature of the bankruptcies is changing. Recent pre-packaged bankruptcies are negotiated and voted on prior to the actual bankruptcy filing. These pre-packaged filings have allowed preferential treatment to various groups of plaintiffs and diminished the rights of future plaintiffs. Additionally, insurers’ interests have not been represented in the pre-petition negotiations, thereby potentially increasing and accelerating insurers’ obligations.

Quantification of asbestos liabilities is a very difficult task for actuaries who typically like to use past experience to predict the future, she explained. Traditional actuarial methods cannot be used because of the long latency from exposure to disease manifestation, and the potential involvement of multiple policy periods for individual claims.

For insurers and reinsurers, the best way to come up with an estimate is to reportedly do an exposure-based study.

This considers a wide range of factors, including mix of insureds, types of coverage, policy wording, attachment points and limits, years of coverage, claims handling and settlement activities. At the end of this process, insurers reportedly have a greater understanding that enables them to deal strategically with their exposures.

Biggs noted that a May 2001 estimate by Tillinghast puts the ultimate cost of asbestos-related losses at $200 billion, and estimates that net U.S. insurer and reinsurer losses will reach between $55 billion and $65 billion. At the end of 2002, paid and reported asbestos-related losses and expenses totaled $45 billion, while reported losses were estimated at $52 billion at year-end 2003.

Recent disclosures by U.S. insurers on increases to their asbestos reserve levels have raised the pressure on peer companies to make similar increases. “There is a lot more pressure as each company comes forward,” Biggs said.

She noted that rating agencies generally do not view this as a solvency issue for U.S. insurers. Also, this is not just a U.S. problem and that many insurers and reinsurers around the world are making increases in their recognized asbestos liabilities.

Looking ahead, she sees no indication that asbestos claims and litigation activity is about to slow down, particularly in the absence of federal legislative reform. While some progress is being made in terms of reforms at the state level, it is difficult to implement meaningful changes on a state-by-state basis. As long as some states retain liberal procedures and claims remain portable, forum shopping will be a problem.

“Thirty years after peak usage, this is still a major problem with significant activity on the claims side and no major legislative reform has yet been enacted. As one of my colleagues, Mike Angelina, has called it, it is the “energizer bunny” of toxic torts. It keeps going and going and going,” Biggs concluded.