Fitch also estimates the amount of reserves carried by the U.S. commercial property-casualty industry as of year-end 2001 was just under $15 billion. Mr. Buckley explained this means the U.S. p-c industry so far has incurred liability of $39 billion.

Mr. Buckley said the current survival ratio (reserves to average annual paid asbestos claims) of the p-c industry is "a little over 9 times" as of the end of 2001. Fitch, he explained, took the amount of current reserves for asbestos-related claims and divided by the last three years' average payments to get a sense of how many years of payments have been funded.

He also noted that actuarial firms Tillinghast-Towers Perrin and Milliman USA estimated last year that future ultimate asbestos liabilities for the U.S. insurance industry range from $55 billion to $70 billion. In Fitch's view, this means unfunded amounts of $16 billion to $31 billion, Mr. Buckley said. (He arrived at these amounts by subtracting the incurred liability of $39 billion from the actuarial range.)

For rating purposes, Fitch set a wider range of estimates for future asbestos liabilities, he said:

? For the low end: Fitch has assumed $49 billion in ultimate claims. The estimate assumes that future payments will be $25 billion ($49 billion in ultimate claims minus the $24 billion already paid out.) Since the industry carries just under $15 billion in reserves, Fitch's low estimate implies an unfunded amount of $10 billion.

"That low end assumes that things will get somewhat better and that some of the trends will stabilize and not be as bad as some are thinking but that it will still be a challenging environment for the industry," Mr. Buckley said.

"Our best sense is that the industry in aggregate probably lines up with our low estimate," he added.

? For the mid-end: Fitch assumes $62 billion in ultimate claims, with $38 billion in future payments. Mr. Buckley said "this implies $23 billion unfunded at this point."

? For the high-end: Fitch assumes $74 billion in ultimate claims, which would be about $50 billion in future payments and $35 billion in unfunded claims. Mr. Buckley said classifies this as "conservative."

He also delved into whether reserves for asbestos should be discounted using the present value approach in view of the fact that insurers will be paying out claims over the next 20 plus years.

Fitch believes that discounting claims for p-c insurance companies works well where there is certainty about the amount and timing of a claim, Mr. Buckley said. As an example of this he referred to: structured settlements in workers compensation, where it has been determined how much will be paid to an injured worker every year for a set number of years.

Mr. Buckley then described a grid developed by Fitch that looks at the range of high, mid and low future payments estimates under various discount scenarios--zero percent, 3 percent and 6 percent--to determine what the reasonable range of survival ratios may be.

For a low payment stream and zero percent discount rate (i.e. no discounting): the implied survival ratio for the industry is 14.7 times. The 3 percent "middle of the road" discount rate is 11 times and at 6 percent, or "portfolio rate" for the discount, the survival ratio is 8.5, he said.

For the middle payment stream at zero percent discount the survival rate is 22 times, at 3 percent it is 16 times and at 6 percent it is 12 times, Mr. Buckley stated.

For the high payment stream, at zero percent, the survival rate is 30 times, at 3 percent it is 21 times and at 6 percent it is 16 times.

In Fitch's view, 16-times is the appropriate survival ratio that the p-c industry should be targeting and is the one ultimately that Fitch will be using as a basis for its rating standard, Mr. Buckley said.

"The 16-times implies a present value reserve of $27 billion, or a $13 billion shortfall currently relative to the reserves that are set up," he stated.

As to the possible impact on the earnings and capital of the p-c industry, Mr. Buckley suggested there could be a combination of "shock losses" and a continued earnings bleed.

On the one hand, should the "ultimate shock loss scenario" occur and the industry go to the 16-times survival ratio "in one fell swoop," Mr. Buckley said, based on the capital of the commercial p-c industry and U.S. reinsurance industry, the shock loss would be less than 10 percent of capital. "I don't think we're talking about a widespread solvency problem," he said.

Even if only 25 to 30 insurance companies absorbed the bulk of the shock loss, Mr. Buckley believes that those companies "have the capital to handle this type of charge without broad-based solvency issues."

But if insurers do not shore up reserves and they continue with the current 9-times survival ratio, he predicted "a continued earnings bleed in probably the $2 billion range for many years until these reserves are brought up to where they need to be."

He added that it will be a couple of quarters before Fitch executes its survival-ratio approach in its individual ratings.

This is because Fitch will be spending a considerable amount of time working with insurance companies to ascertain what their payment patterns have been so that Fitch "can apply an appropriate survival ratio that fits the needs of each company, Mr. Buckley stated.

Fitch's report, "Asbestos: Impact on the U.S. Insurance Industry," is available on its Web site (www.fitchratings.com).