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Denial Anger Bargaining Depression Acceptance
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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