At the same time, solvent defendants are under increasing pressure from Wall Street analysts to disclose the magnitude of their potential liabilities and the adequacy of insurance protection. Former “peripheral” as well as new defendants have seen their profile in the litigation rise significantly, as measured by the number of claims (potentially moving from a few claims per year to several thousand) as well as exponential increases in settlement demands.

This activity at the defendant level in turn affects the insurance industry. According to a compilation of data from Note 29 of statutory annual statements, U.S. insurers strengthened their reserve estimates by approximately $4.1 billion during 2001.

With so many uncertainties, projections of the ultimate asbestos liabilities for individual defendants, insurers, and reinsurers are difficult to make. For insurers and reinsurers, traditional actuarial techniques, such as expected loss ratios and triangulation approaches are inadequate, due to:

Diseases which can have latencies of over 40 years.

Claims that can trigger several policy periods and layers.

Plaintiff claims that span multiple defendants.

Many benchmarks or “rules-of-thumb” (see the accompanying table) are used to measure asbestos exposures, but the best way to evaluate an insurers or reinsurers potential liabilities is to review the ground-up exposure. This means identifying the underlying insureds that will present claims, projecting the ultimate liabilities for each, allocating the losses to year, and comparing them to all identified coverage that is available to respond to the claims.

Tillinghast-Towers Perrin has used both “top-down” and “bottom-up” analyses to estimate the total cost of claims arising from U.S. asbestos exposure. The top-down analysis looks at “how much is paid to how many claimants?” The bottom-up approach looks at the sum of many thousands of defendants shares of court awards or settlements, considering portions retained and insured.

Tillinghast projects that asbestos claims from U.S. plaintiffs will ultimately cost $200 billion, with the global insurance industry paying $122 billion. Of this insured amount, we estimate that approximately $60 billion will be covered by U.S. insurers and reinsurers, net of reinsurance recoveries. According to Note 29 data, the U.S. insurance industry paid approximately $23.5 billion and held $13 billion in reserves (including IBNR) as of year-end 2001.

Ground-up exposure-based analyses are rigorous, intensive exercises for insurers, both primary and excess. Information used to estimate the defendants ultimate costssuch as the number of filings, average indemnity awards and expense-to-indemnity ratiosgenerally must be gleaned from the claim handlers files.

Further, it can be difficult to identify coverage written as far back as the 1940s (for both reported claims as well as high excess layers and post-initial coverage block years, where claims may not yet be open). Coverage terms, including years, attachments, limits, shares and exclusions, may not exist in an electronic format.

Reinsurers, too, can perform exposure-based analyses, but for them, the task can be even more daunting.

Identification of coverage at risk is more difficult for a reinsurer than for a direct insurer. A direct writer has the advantage of the ability to search underwriting records to identify coverage issued to target asbestos defendants. With the exception of facultative certificates, a reinsurer cannot perform this type of comprehensive search for potential exposure.

For treaty business, a reinsurer can identify potential exposure to specific underlying insureds once it has been notified of claims or precautionary notices. For proportional covers, the reinsurer will often receive only a bordereau report and may not ever receive the names of underlying defendants. Thus, a reinsurers provision for as yet unreported exposures typically needs to be larger than that of a direct insurer.

Even when a reinsurer identifies coverage at risk, it may be more difficult to estimate whether the coverage will be triggered. Often the reinsurance attachment is defined relative to the ceding companys coverage terms, and the attachment relative to the first dollar of loss is difficult to ascertain.

In addition, direct writers have better access to defendant level informationsuch as annual claim filings and settlement datathat can be used to estimate the ultimate losses for a specific underlying insured, in order to determine the extent to which coverage may be eroded.

Also, direct writers receive information earlier than reinsurers. Notification of potential claims by defendants to their higher excess insurers, by direct insurers to their reinsurers (and on down the retrocessional chain), can take months.

Further, the reporting lag implicit in the reinsurance industryoften in the form of quarterly reports through brokersis frequently exacerbated by the effort required to properly determine the reinsurance cessions corresponding to a ceding companys gross liability estimates.

Although exposure-based analyses are more difficult for reinsurers, their challenges are not insurmountable. One potential solution for a reinsurer would be to use a burn-factor approach, whereby assumptions regarding magnitude of loss can be generated for categories of underlying insured defendants to estimate the percentage of coverage layers (varying by attachment and year) that may ultimately be exhausted.

Another solution would be to simulate or otherwise estimate missing information, including defendant-level data used to estimate their ultimate costs or coverage terms, such as underlying limits used to determine a ground-up attachment.

While there is more uncertainty surrounding reinsurers estimates, the exercise of identifying coverage at risk and performing an exposure-based analysis provides valuable knowledge. Further, as more direct writers attempt to better manage their asbestos liabilities, the reinsurers who are next in line may benefit from this initial work.

Mike Angelina is a principal of Tillinghast-Towers Perrin in Philadelphia, while Jenni Biggs is a principal in the firms St. Louis office.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.