Asbestos Reserving Issues and Trends Kevin Madigan, MHL/Paratus September 23, 2002

Asbestos Reserving Issues and Trends

Kevin Madigan, MHL/Paratus

September 23, 2002

The 5 Stages of Loss

The 5 Stages of Loss

DenialAnger

BargainingDepressionAcceptance

The 5 Stages of Loss

DenialAnger

BargainingDepressionAcceptance

At which stage is the insurance industry?

Easy to focus on the insane aspects of the litigation and to lose sight of painful facts.

Plaintiffs bar loves these cases because they are easy.

EDITORIAL COMMENTS

Underwriting catastrophe

EDITORIAL COMMENTS

Underwriting catastrophe“Asbestos has caused more cancer in the workplace than all other substances combined”

EDITORIAL COMMENTS

Underwriting catastrophe“Asbestos has caused more cancer in the workplace than all other substances combined”

Smoking Gun DocumentsExpected and Intended?

EDITORIAL COMMENTS

Underwriting catastrophe“Asbestos has caused more cancer in the workplace than all other substances combined”

Smoking Gun DocumentsExpected and Intended?

Kelly-Moore sues Dow and Union CarbideSubrogation?

More CommentsPeripheral Defendants

“We were lazy”

More CommentsPeripheral Defendants

“We were lazy”

Brake linings can be up to 50% asbestos by composition

More CommentsPeripheral Defendants

“We were lazy”

Brake linings can be up to 50% asbestos by composition

Plaintiffs getting less money even though solvent defendants paying more

More CommentsPeripheral Defendants“We were lazy”

Brake linings can be up to 50% asbestos by composition

Plaintiffs getting less money even though solvent defendants paying more

Senate hearings; Cheney & Halliburton

Lawyerso Plaintiffs o Defendantso Policyholders’ Coverage Counsel o Bankruptcy Expertso Primary vs. Excess Carriers’ Coverage Counsel o Reinsurance Disputes

Evaluating LiabilitiesBenchmarks – what to do “in a pinch”

Evaluating LiabilitiesBenchmarks – what to do “in a pinch”

• Survival Ratios (Ratio of reserves to average annual paid losses)

Evaluating LiabilitiesBenchmarks – what to do “in a pinch”

• Survival Ratios (Ratio of reserves to average annual paid losses)

• IBNR to Case Ratios

Evaluating LiabilitiesBenchmarks – what to do “in a pinch”

• Survival Ratios (Ratio of reserves to average annual paid losses)

• IBNR to Case Ratios• Implied LDFs

Evaluating LiabilitiesBenchmarks – what to do “in a pinch”

• Survival Ratios (Ratio of reserves to average annual paid losses)

• IBNR to Case Ratios• Implied LDFs• Market Share Methods

Evaluating LiabilitiesBenchmarks – what to do “in a pinch”

• Survival Ratios (Ratio of reserves to average annual paid losses)

• IBNR to Case Ratios• Implied LDFs• Market Share Methods

None of these really do the trick

Evaluating LiabilitiesMore appropriate method(s)

Understand the legal environment and the way all of the pieces fit together. The actuary has to synthesize a large volume of qualitative and quantitative data.

Evaluating LiabilitiesMore appropriate method(s)

1. DETAILS

2. DETAILS

3. DETAILS

Evaluating LiabilitiesMore appropriate method(s)• Talk and LISTEN, LISTEN, LISTEN to Claims

professionalsThey know more about this than most of us ever will

Evaluating LiabilitiesMore appropriate method(s)• Talk and LISTEN, LISTEN, LISTEN to Claims

professionals• Gather information

Nature of exposure and available insurance

Evaluating LiabilitiesMore appropriate method(s)• Talk and LISTEN, LISTEN, LISTEN to Claims

professionals• Gather information• Use modeling skills to analyze the source of the

exposure

Evaluating LiabilitiesMore appropriate method(s)• Talk and LISTEN, LISTEN, LISTEN to Claims

professionals• Gather information• Use modeling skills to analyze the source of the

exposure• Produce distributions of IBNR

Evaluating LiabilitiesMore appropriate method(s)Exposure Analysis – GROSS basis

DirectAssumed (traditional) reinsuranceRetrocessional Cover

Analyze Ceded Losses SeparatelyCollectibility IssuesCommutations

Evaluating LiabilitiesDirect Insurance

o Ground-Up analysis of insured’s liabilitieso stochastic if possible

o Future Frequency and Severityo How Many More Years?

o Allocation to past Policy Yearso Knowledge of performing coverageso Primary vs. Excesso Number of Occurrenceso Push through insurance program to calculate GROSS

liabilitieso Insolvents, SIRs, “bare years”o Products vs. Non Products (Limits!)o Pure IBNRo Lots of judgment

Evaluating LiabilitiesAssumed Reinsurance

o Ground-Up is harder to pull off due to data issues (e.g. coverage)

o Top-down analysis of Gross liabilitieso Cedant reserving and reporting patternso Source of loss to cedant (original insureds)o Recent Annual Average “billings” – paid and caseo Prior consumption of coverageo Known, but unreported, potential riskso Lots of judgment

Evaluating LiabilitiesRetrocessional Cover

o Two optionso Exhaustive and expensive studyo Understand the mechanics and participants and do a

bulk studyo Lots of judgment

Evaluating Liabilities

• Talk and LISTEN to Claims professionals, then apply modeling skills to produce distributions of IBNR.

Evaluating Liabilities

• Talk and LISTEN to Claims professionals, then apply modeling skills to produce distributions of IBNR.

• Thin data & lots of uncertainty.

Evaluating Liabilities

• Talk and LISTEN to Claims professionals, then apply modeling skills to produce distributions of IBNR.

• Thin data & lots of uncertainty. • Get fact AND opinion from knowledgeable

people, and use it to model the situation