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Skeletons in the Cupboard -Latent claim developments in General Insurance,Why they have happened and Possible inferences for healthcare
Camilla Bennett and Kenneth McGaughey, PricewaterhouseCoopers LLP27 April 2004, 2004 Healthcare Conference, Scarman House, University of Warwick
Contents
Background to known latent claims within General InsuranceAn example of techniques used in General Insurance to reserve for known latent claimsCan insurers price for currently unknown latent claims?Opportunities to debate how this applies to healthcare
1. Background to known latent claims within General Insurance
Estimated ultimate claims c
ost could be over $250bn
Asbestos
What is asbestos?Why is asbestos a problem?
Not easy to detect and diagnose –except by chest X-rays
Scaring or thickening of the pleura – Not generally disabling
Pleural Plaques
10-20 yearsThickening or hardening of the pleura –Can be disabling
Pleural-thickening
15-30 yearsPneumoconiosis, non-cancerous scarring of lung tissue – Can be disabling
Asbestosis
20-30 yearsCancer of the bronchial – Often fatalLung Cancer
30-40 years can be as long as 50 yearsCancer of membranes that cover the lungs – Fatal within 2 years of diagnosis
Mesothelioma
Latency PeriodDescriptionDisease
US Asbestos
1982 2002Number of Claims 21,000 600,000Number of Defendants 300 8,400Total Costs to Date $1bn $54bnBankruptcies 3 64Estimated future costs $38bn $200bnSource: Standard & Poors
US Asbestos
Legal history
Borel v Fibreboard, 1973 - policies affectedExclusions – Asbestosis (late 1970s / early 1980s) - Absolute asbestos clause (mid-1980s)Wellington agreement, 1985 – “injury in fact” exposure allocationAsbestos Claims Facility (1985-88) and Centre for Claims Resolution (1988-2001) – producers & insurers work togetherGeorgine settlement (early 1990s) – signs of an asbestos related disease needed – Supreme court overturned (1997)Fibreboard (1993) – global settlement – Supreme Court rejected (1999)Fuller-Austin judgement (2002) – all pending & future coverage to be paid to trust immediately – still subject to appeal
US Asbestos
Other issues
Level of medical evidence requiredVenue shoppingBundlingStressKnowledgeAggregations
UK AsbestosWhy is asbestos an issue in the UK?How does this affect insurers?
Ultimate market loss estimate £7-25bn (HSE)Claims on Employers Liability policies Exposures from 1940–90 with peak around late 1960s–70sEstimated years of peak claims 2000-20
Legal issues to dateFairchild rulingABI protocolCape rulingGeologistics vs FSCS
Other issuesSolicitors use “scan vans”Bad press / reputationState support
US Pollution
BackgroundSuperfund or CERCLA, 1980Retroactive, strict, joint & severely liableNPL sites; other sites 10s of 1000s
Issues impacting insurersGL policiesExclusion clausesTriggerAllocationAggregationsExpensesVenue shopping
Other latent claims
Current known:Vibration White Finger (“VWF”)Noise Induced Hearing Loss (“NIHL”)Toxic MouldSilicaStress
Possible future:Tobacco – passive smokingMobile phonesClean rooms
Impact of legal precedent on bodily injury reserve estimates
OgdenNon-pecuniary loss awardsNHS ChargesCFAsWoolfPeriodic payments
2. An example of techniques used in General Insurance to reserve forknown latent claims
Number of Mesothelioma deaths in the UK
-
200400
600800
1,000
1,2001,400
1,6001,800
2,000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Report year
Num
ber
of m
eso
clai
ms
HSE
2. An example of techniques used in General Insurance to reserve forknown latent claims
The number of Mesothelioma deaths and the HSE's predicted Mesothelioma deaths in the UK
0
500
1,000
1,500
2,000
2,50019
68
1973
1978
1983
1988
1993
1998
2003
2008
2013
2018
2023
2028
2033
2038
2043
2048
2053
2058
2063
2068
Year
Num
ber
of M
esot
helio
ma
deat
hs
Mesothelioma deaths reported HSE predicted Mesothelioma deaths
Source – Mesothelioma mortality in Great Britain : Estimating the future burden
UK asbestos modelling (1)Assess exposures
Estimate ultimate number of claims
Disease incidence rates & mortality tablesNumber of claims reportedMarket versus Company specific information
UK as be s tos imports and as s ume d e xpos ure le ve ls
0
50
100
150
200
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
Ye ar
Ann
ual U
K a
sbes
tos i
mpo
rts
(tho
usan
ds o
f ton
nes)
Im port s
Number of Mesothelioma deaths in the UK
-
200400
600800
1,000
1,2001,400
1,6001,800
2,000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Report year
Num
ber
of m
eso
clai
ms
HSE
UK asbestos modelling (2)
Estimate ultimate ACPCCourt awardsInsurer’s settled and outstanding ACPC
BenchmarksSurvival ratiosIBNR:OS
Data issuesInsolvenciesPaper recordsClaims capture
Number of Mesothelioma deaths in the UK
-
200400
600800
1,000
1,2001,400
1,6001,800
2,000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Report year
Num
ber
of m
eso
clai
ms
HSE
Other modelling approaches
Direct insurersGround up loss by assuredApply to insurance
ReinsurersGround up lossBenchmarking
Data issues
Number of Mesothelioma deaths in the UK
-
200400
600800
1,000
1,2001,400
1,600
1,800
2,000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Report year
Num
ber
of m
eso
clai
ms
HSE
3. Can insurers price for currently unknown latent claims?
EL – pricing for disease claims
Historic pricingHigh uncertaintyLack of dataCompetitionPolicies not claims made
Split disease and non-disease componentsDefinition of long tail diseaseEffective dateFundingPotential cost savings and research benefits
EL – capital for disease claims
Capital implicationsCapital allocation – pricing & performance measurementDisease claims – high insurance riskEL capital intensiveCP190 - ICAs
4. Opportunities to debate how thisapplies to healthcare
Critical Illness
Disease coverage / exclusionsClaims on existing policies – creeping definitionsDifficulty of pricing / reserving models
Data sources already poorNew diseases/conditions – excluded from experienceMaybe unexpectedly covered under PTD
Claim date definition
Over to you …
Final message – Always be paranoid
Tight wordings – direct and reinsuranceFuture legal environmentCompensation cultureReputationDataUncertainty
Skeletons in the Cupboard -Latent claim developments in General Insurance, Why they have happened and Possible inferences for healthcare
[email protected], +44 20 7212 3474 [email protected], +44 20 7212 6490