Asbestos claims, long considered an ever-expanding problem for property-casualty insurers, have declined recently as a result of reform efforts–but that doesn't mean insurers can stop worrying about their reserves, experts warn.

“We're seeing a significant change in asbestos litigation,” said Faten Sabry, a vice president with NERA Economic Consulting in New York.

Specifically, Ms. Sabry pointed to two phenomena fueling the change–a series of asbestos tort reforms passed in several states, and a ruling last year by U.S. District Court Judge Janis Graham Jack in the Southern District of Texas, Corpus Christi, in a silica multidistrict suit that sharply criticized the practices of some law firms and those they hired to screen potential plaintiffs for asbestosis.

Ms. Sabry cited Judge Jack's admonishment of screeners who diagnosed victims with both asbestosis and silicosis, which is extremely rare medically. The screening firms used by some plaintiffs' attorneys diagnosed thousands of claimants with both diseases. If correct, so many diagnoses of silicosis would be a national crisis, Ms. Sabry said, referring to comments made by Judge Jack.

Thousands of past diagnoses of silicosis “were more the creation of lawyers than doctors,” Judge Jack wrote in her June 2005 ruling. “A golfer is more likely to hit a hole-in-one than an occupational medicine specialist is to find a single case of both silicosis and asbestosis, [yet one] parked a van in some parking lots and found over 4,000 such cases…These diagnoses were driven by neither health nor justice–they were manufactured for money.”

Judge Jack's decision, Ms. Sabry said, was a major event, finally bringing to light the fact that there's a problem with mass screenings in search of plaintiffs for asbestos litigation–specifically that the claimants are mostly people who are not sick.

The judge in her ruling named nine doctors who were most prominently involved with disputed diagnoses, prompting an announcement by the Johns-Manville Trust that it would no longer accept claims diagnosed by those physicians.

At the same time, several states have enacted strong tort reforms designed to reduce the burden of asbestos cases on their already overburdened dockets. Most of these laws–passed in Texas, Mississippi, Ohio and Florida as well as other states–require some degree of impairment before a victim of asbestos exposure can seek compensation.

In these states, nonimpaired claimants are either being told they cannot make a claim or that their cases will be placed on inactive dockets, where the claims can be revived should the individuals develop asbestos-related illnesses in the future.

Mississippi–which had earned a “judicial hellhole” designation for its court system in 2002 and 2003–also sought to limit the cases filed in the state with a 2004 reform measure requiring that any plaintiff filing a claim must live in Mississippi, have been exposed to asbestos in the state, or have a significant connection to Mississippi.

The changes being made in the states “are having a positive impact” on asbestos claims for insurers, said Linda Barber, a director of the financial services practice for Navigant Consulting in Princeton, N.J. Navigant maintains a database of asbestos claims information, collected from public information such as company filings and other data, she noted.

The number of claims filed with the Manville Trust, according to Ms. Barber, has decreased sharply since 2002. In litigation, she said, the decrease in cases is even more dramatic when looking at purely new claims rather than a combination of new claims and those that are re-filed in another jurisdiction after being dismissed.

A report published by the Washington-based American Academy of Actuaries in February–”Current Issues in Asbestos Litigation”–highlighted the significance of Manville claims trends, noting that the Johns-Manville Corp. was once the largest maker of asbestos-containing products and supplier of asbestos in the United States. According to the report, most asbestos claimants have sought compensation from the Manville Personal Injury Trust, set up after the firm filed for bankruptcy in 1982.

However, Jennifer Biggs, a principal and consulting actuary with the Tillinghast business of Towers Perrin in St. Louis, Mo., and one of the authors of the Academy report, warned that a decline in claims during 2004-2005 could be misleading. In particular, she noted that the Manville Trust made several changes to how it classifies and pays claims that became effective in late 2003, leading to a surge in claims just before the change was made.

Payment levels for less severe claims were higher prior to implementation of the new trust distribution process, providing incentive to empty inventories of the nonmalignant claims, she said.

Ms. Barber said the number of defendants named on average in an asbestos case has fallen dramatically–from approximately 70 defendants, on average, in 2001 to an average of roughly 45 defendants in 2005.

Plaintiffs' attorneys, who have had their business model razed by Judge Jack, however, have felt perhaps the most significant effect of these reforms.

“From what I understand, mass screenings have really dropped off,” Ms. Biggs said. With medical criteria rules being adopted in some states, and with bankruptcies pending for several traditional payers of asbestos claims, coupled with lower payments from Manville, “there's been less incentive to recruit unimpaired claimants through the screening process.”

Additionally, everyone is waiting to see what may result from the current scrutiny of the mass screenings, such as U.S. House Energy and Commerce Committee inquiries and a New York grand jury investigation, Ms. Biggs said.

Despite the positive news emanating from Judge Jack's courtroom and statehouses across the country, it does not appear as if the asbestos problem is going away anytime soon, or that insurers will be able to lower their reserves for asbestos exposure. “Insurers are still underreserved for asbestos,” said Ms. Barber. “The gap is not as large as it used to be, but it is still significant.”

Additionally, while Judge Jack and state lawmakers may have helped to eliminate vast numbers of nonimpaired cases from court dockets, the claims that remain are typically more serious, and are getting more expensive for insurers.

“The cost of defending malignant claims has gone up,” said Ms. Sabry, adding that the increased per-claim costs relating to malignant claims will be the “main concern” for insurers going forward.

While the overall number of claims has been declining, Ms. Biggs also acknowledged that, among insurers, “there's some concern, because we've seen some increases in the number and cost of mesothelioma claims.”

Over the past few years, the number of meso claims against the Manville Trust has increased, which is likely due to greater awareness and diagnoses of mesothelioma cases, as well as an increase in claimants' propensity to sue, rather to an increase in disease incidence, she explained.

Additionally, Ms. Biggs noted the number of annual mesothelioma deaths is higher than of those filing claims with the Manville Trust, meaning more claims might be filed as more victims are made aware of their legal options.

Ms. Sabry noted, however, that the problem of paying malignant asbestos claims is a better one for the insurance industry than that of paying the overwhelming number of claims prior to the state reforms and Judge Jack's decision.

The greatest enemy of insurance companies is an unknown, she said, noting that the number of people with malignant claims is significantly more easily projected as an ongoing risk. “It's a much more contained population of people,” she said. “There are good estimates out there of how many mesothelioma deaths should occur each year. It's a better problem to put your hands around–a better problem to quantify.”

Ms. Biggs also noted that mesothelioma is an easier problem to track than it has been in the past. The disease was given a specific code for death certificates in 1999, and Ms. Biggs said data from the Centers for Disease Control and Prevention has shown a “steady” number of roughly 2,500 annual deaths from the disease.

Turning to the impact of state reforms, Ms. Biggs said asbestos litigation in states enacting reforms will likely change to a more individualized process involving single-plaintiff claims by the most severely injured. “This is likely to increase the average compensation for malignant claims as well as expenses for claimants and defendants if more cases go to trial, requiring the additional expenses of discovery and other legal procedures,” she said.

William Brauer, claims director for GE Insurance Solutions, in charge of reinsurance claims, argued against the notion that the claims left standing after the various reforms will be significantly more expensive for insurers to settle.

“There's an impetus on both sides to settle cases rather than litigate them,” he said. Although some plaintiffs have increased their settlement demands, it “doesn't seem that they want to go to trial any more than the defense does,” he added.

Insurers may also find themselves with an increasing amount of leverage in their dealings with defendant companies, based on the experience of the Congoleum case, he said. In that case, Congoleum sought to enter into a pre-packaged bankruptcy–commonly referred to as a “pre-pack”–including a settlement of the company's asbestos liabilities.

In previous “pre-packs,” the company filing for bankruptcy negotiated its asbestos settlement directly with the plaintiffs, and their insurers were not parties to the talks. In the Congoleum case, however, the company's insurers–including ACE and CIGNA–successfully worked to have several proposed “pre-packs” thrown out by the bankruptcy court, and submitted their own proposed settlement.

Based on the Congoleum experience, “insurers will have more of a say in setting up bankruptcy settlements,” Ms. Sabry said.

Overall, Ms. Biggs said, “I am more optimistic than I was a few years ago,” regarding asbestos claims and insurance companies.

Ms. Sabry echoed those sentiments. “There's definitely good news,” she said, “and asbestos defendants and insurance companies haven't had any good news in a long time.”