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©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

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Page 1: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

©Towers Perrin

Michael E. Angelina, ACAS, MAAAKevin F. Downs, FCAS, MAAA

CAMAR - Spring 2005 Meeting

Princeton, NJJune 2, 2005

Page 2: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

2©Towers Perrin

Agenda

Concerns in the Current System

Quantification of Liabilities

Potential Solutions

Page 3: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

3©Towers Perrin

Concerns in the Current System (1)

Plaintiffs should demonstrate injury to file a claim The number of claim filings has increased dramatically

2003 claim filings against the Manville Trust exceeded 100,000

Fewer than 10% of claims are malignant Per RAND, ⅔ to ¾ are unimpaired The right to seek recovery if/when an injury manifests should

not be limited

Each claim should stand on its own merit Restrictions on mass consolidations

Venue should be controlled Avoid forum shopping in “magic jurisdictions”

Page 4: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

4©Towers Perrin

Surge in Claim FilingsManville Trust - Injury by Year Filed

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year Filed

Nu

mb

er

of

Cla

ims

(Denied) or Unknow n

Non-Malignant

Cancer

Mesothelioma

Note: Excludes Non-U.S. claims

2004 Manville Trust Claim Filings: 14,500

2005 Manville Trust Claim Filings: 9,300 at May 2005; 22,320 annualized

Page 5: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

5©Towers Perrin

Change in Disease Mix

Manville Trust - Injury by Year Filed

6% 6% 5% 5% 5% 4% 3%

13% 12% 11%7%

9% 9%6%

10%7% 8%

6% 6% 7%

81% 84%89%

85% 86%92%

85%89% 88%

91% 93%90% 90%

4%2%3%4%4%4% 2%4%

82%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year Filed

Per

cen

t o

f C

laim

s F

iled

by

Cat

ego

ry

Non-Malignant

Cancer

Mesothelioma

Page 6: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

6©Towers Perrin

Evidence of Forum Shopping

1970–1987 1988–1993 1994–1997 1998–2000

100

80

60

40

20

0

Percent

Other states

NY

OH

TX

MS

IL

WV

MD

NJ

PA

CA

Source: RAND, January 2003

Page 7: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

7©Towers Perrin

Increasing Numbers of Claimants Are Unimpaired

1982 4% of claims showed no manifest asbestos-related injury(RAND)

1993 Up to one-half of all asbestos claims have little or no physical impairment (Harvard Journal of Legislation)

1998 No evidence of disease in 57% of asbestos claims(Manville Trust)

2001

74% of pending claims are unimpaired(confidential report prepared for a defendant)

Two-thirds of claims show no evidence of impairment(Babcock & Wilcox)

Vast majority of claims provide no evidence of impairment(W.R. Grace)

Source: RAND

Page 8: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

8©Towers Perrin

Concerns in the Current System (2)

A low percentage of total payments have reached the claimants. Per RAND: 30% - defense transaction costs 29% - plaintiff attorney fees and legal costs 41% - to claimants

Resources are limited 77 defendant companies have sought bankruptcy

protection But defendant pool has increased to ~8,400

Future sick may not be compensated

Page 9: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

9©Towers Perrin

Number of Asbestos Related Bankruptciesper Year

2

1 1

4

3 3

4

2 2 2 2

0

1 1

0

3

2

7

10

12

5 5

1

0

2

4

6

8

10

12

14

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Nu

mb

er

While only five bankruptcy petitions were filed during each of 2003 and 2004, the reduced level should not be misinterpreted as a sign of improvement in the asbestos litigation crisis. Rather, the number of 2003-2004 petitions was likely lower as defendants delayed decisions as they awaited the outcome of federal reform efforts.

Note: Graph excludes a bankruptcy in 1976.

Page 10: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

10©Towers Perrin

Differences Between Traditional and Pre-Packaged Bankruptcies

Can take years to complete1

File petition Negotiate with creditors File reorganization plan File disclosure statement Solicit votes Confirmation hearing

Intended to be completed within a few months of filing Negotiated and voted on before filing Combined hearing to confirm plan and

disclosure

Traditional Pre-Packaged

1 Johns Manville filed bankruptcy in 1982 and its plan was not confirmed until 1988; Babcock & Wilcox filed bankruptcy in 2000 and its plan has not yet been confirmed.

Insurance coverage generally exhausted or settled, or insurers included in negotiations

Court appoints claimant representatives Future’s Rep involved in negotiation

for >50% equity

Commonly include a pre-petition trust to pay near full value on current claims Plaintiff attorneys with large inventories

negotiate matrix agreements that benefit their own clients, but do not owe a duty to all claimants Disease criteria broadly defined Claimants not fully compensated, so

remain eligible to vote on the bankruptcy plan

Generous awards to lower disease severity classes

Significant portion of equity can be secured (therefore not available to bankruptcy trust)

Insurers interests are not represented in pre-petition negotiations

Page 11: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

11©Towers Perrin

Problems with Pre-Packaged Bankruptcies

Negotiated in secret by a select group of lawyers, whose clients receive preferential treatment relative to other claimants with similar disease

Future’s Representative bound by pre-petition settlements

Debtor is negotiating with insurers’ money

Conflicts of interest are abundant

Source: Mark D. Plevin/Crowell & Moring LLP

Page 12: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

12©Towers Perrin

Independence vs. Conflicts of Interest?

From appointment of Kenesis (5/2002) until pre-package bankruptcy filed (9/16/2003), AC&S settled more than $2 billion of claims Settlements over prior 20 years totaled $600 million

Pre-packaged plan stipulated that these settlements could not be challenged by the asbestos trust or AC&S

GHR

Joseph Rice/Ness MotleyPre-petition Committee

Pre-petitionTrust

– Categories A, Bx, By, C, D

Kenesis

AC&S’ counsel for pre-packaged bankruptcy

Also negotiating AC&S claim settlements

70% Ownership

ClearingHouse

AC&S

“Independent” claim reviewer Paid $3M to review

documentation of 250,000 Category D claimants

Purchased Clearing House in June 2003

Paid $2M as subcontractor of Kenesis

Sole proprietor, J. Benee Wallace, paralegal of Ness Motley

Page 13: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

13©Towers Perrin

AC&S Plan Denied Confirmation

On 1/23/04 Judge Newsome (Delaware federal bankruptcy court) denied confirmation of the AC&S pre-packaged bankruptcy plan, finding that the plan Was not proposed in good faith

Unjustly prejudiced by plaintiff attorneys Largely drafted by and for the benefit of the pre-petition

committee through various pre-petition settlements Unfairly favors one plaintiff over another

Fundamentally unfair that one claimant with non-symptomatic pleural plaques will be paid in full, while someone with mesothelioma runs the substantial risk of receiving nothing

Both should be compensated based on the nature of their injuries, not based on the influence and cunning of their lawyers

“The court is informed that other judges have confirmed plans with such discriminatory classifications. This judge

cannot do so in good conscience.”

Page 14: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

14©Towers Perrin

How to Quantify Asbestos Liabilities?

Many use benchmarks or rules of thumb Market share techniques

For example, 5% of GL premium volume for affected years translates to 5% share of ultimate liabilities

Survival ratio techniques equals ratio of total reserves divided by average annual

payments U.S. net asbestos survival ratio at year-ends 2001, 2002,

2003 = 8.8, 11.4, 10.6, respectively A.M. Best using an undiscounted survival ratio of 18 - 20.

Aggregate development multiples of paid losses, case reserves, or reported losses

Comparisons to peer companies (e.g., significant reserve additions)

Page 15: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

15©Towers Perrin

How to Quantify Asbestos Liabilities?

Exposure-based modeling will improve understanding of ultimate A&E liabilities

For an insurer or reinsurer, it considers Mix of insureds Types of coverage

Policy wording

Attachment points and limits

Years of coverage

Claims handling and settlement activities

Greater understanding equips the defendant, insurer, or reinsurer to deal strategically with its exposure

Page 16: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

16©Towers Perrin

Asbestos Insurer/ReinsurerExposure-Based Analysis

Steps:

(1) Identification of exposure to asbestos defendants

(2) Projection of ground-up ultimate loss and expense for known asbestos defendants

(3) Allocation of defendant losses across coverage block

(4) Comparison of losses in a given year to insurer / reinsurer coverage terms

(5) Provision for non-products losses

(6) Provision property damage, DJ expense

(7) Provision for “pure” IBNR

(8) Ceded / net analysis

(9) Provision for uncertainty

Page 17: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

17©Towers Perrin

Asbestos Insurer/ReinsurerExposure-Based Analysis

Tier 1: Manufacturer/producers in litigation since inception Will use all available insurance

coverage Tier 2: Became involved shortly after Tier 1

companies Some will exhaust all insurance

coverage Others will not hit highest layers due

to smaller share of industry

Tier 3: Manufacturers, distributors and installers brought into litigation due to Tier 1 and Tier 2 bankruptcies Lesser exposure due to

encapsulated products or limited distribution

Tier 4: Owned/operated facilities where

asbestos used and third parties exposed on premises

The Types of Asbestos Defendants

Page 18: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

18©Towers Perrin

Exposure-Based Analysis:(1) Identification of Exposure to Asbestos Defendants

List all asbestos claims / notices

Identify all coverage issued to major asbestos defendants Review non-asbestos claims/notices Search of underwriting records for direct coverage

and facultative reinsurance Cedent audits for reinsurers’ treaty business Review coverage profiles of major defendants to

identify cedent involvement and potential reinsurer treaty coverage

Research corporate genealogy Identify producers of “at risk” products

Page 19: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

19©Towers Perrin

Exposure-Based Analysis:(1) Identification of Exposure to Asbestos Defendants

Practical Issues: “Missing” coverage Unknown coverage terms

Exclusions in underlying policies

Reinsurer attachment relative to first dollar

Potential reinsurer benefit from client’s inuring facultative coverage

Page 20: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

20©Towers Perrin

Exposure-Based Analysis:(2) Projection of Ultimate Ground-Up Loss and Expense for an Asbestos Defendant

Frequency / severity projection Project future claim filings Select average indemnity and future trend Estimate expense load

Special considerations Coverage exhaustion / settlements Bankruptcies Changing litigation profile of the defendant

Incremental v. cumulative experience

Changes in mix of claims by disease and state

Page 21: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

21©Towers Perrin

Exposure-Based Analysis:(2) Projection of Ultimate Ground-Up Loss and Expense for an Asbestos Defendant

Transaction costs have consumed more than half of total spending and are likely to increase in the future No formal joint defense mechanisms remain (e.g.,

ACF, CCR) “Settlement” philosophy hasn’t worked Newer defendants

Discovery costs (product, coverage)

“Fight or die”

Page 22: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

22©Towers Perrin

Exposure-Based Analysis:(3) Allocation of Defendant Losses Across Coverage Block

Allocate ground-up ultimate indemnity and expense to year Compare to available coverage

Reflect expense treatment (varies by policy) Consider coverage disputes, choice of law Consider other erosion of products aggregate limits Consider reinsurance cessions to estimate net losses

Asbestos Insured XYZ's Coverage Chart

1930…

1978 1979 1980 1981 1982 1983 1984 1985 1986

Year

Co

vera

ge

Am

ou

nt

$

Primary

Excess 1

Excess 2

Excess 3

Excess 4

Excess 5

----------------- Self - Insured --------------------

Page 23: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

23©Towers Perrin

Exposure-Based Analysis:(4) Comparison of Losses to Coverage Terms

Example: More detailed coverage description of Excess 1 Layer in 1980

0

2

4

6

8

1980

$ M

illio

ns

Excess 1 70% Insurer GHI

Excess 1 10% Insurer ABC

Excess 2

Excess 110%

InsurerABC

Excess 120%

InsurerDEF

Excess 170%

InsurerGHI

Primary - Insurer JKL

Page 24: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

24©Towers Perrin

Exposure-Based Analysis:(4) Comparison of Losses to Coverage Terms

Example: Comparison of Losses in a Given Year to Insurer / Reinsurer Coverage Terms

If Insurer ABC wrote 10% of $5 million xs of $1 million in 1980, and ultimate losses allocated to 1980 totaled $1,000,000, then Insurer ABC’s gross liability

would be $0 $4,000,000, then Insurer ABC’s gross liability would

be $300,000 (= 10% x ($4,000,000 – $1,000,000)) $6 million, then Insurer ABC’s gross liability would

exhaust its limit of $500,000

Page 25: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

25©Towers Perrin

Exposure-Based Analysis:(5) Provision for Non-Products Losses

Non-products losses without products exposure Most often premises related For most, absence of aggregate limits has no impact

Non-products losses by traditional products defendants A limited number of traditional products defendants have been

successful in bringing non-products claims Attorneys are clever

Generally due to exhausted products coverage “Reclassify” claims to reinstate products limits File operations claims to access additional coverage, generally

written without aggregate limits Aggregate limits may be imposed

Wellington Bankruptcy negotiations Settlements

Page 26: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

26©Towers Perrin

Exposure-Based Analysis:(6) Provision for Property Damage, DJ Expense

Significant property damage liability experienced by only a few defendants

DJ Expenses Consider ratios of paid DJ/paid loss & ALAE Consider DJ reserves Consider recent DJ payment levels and future

multiples Consider (changes in) staffing levels

Page 27: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

27©Towers Perrin

Exposure-Based Analysis:(7) Provision for Pure IBNR

Emergence of additional exposure arising from additional coverage / new defendants Estimate annual emergence Estimate future reporting horizon and rate of decline Consider severity of new exposure

Adverse development on known accounts Uncertainty with newer risks

Coverage identification / ”missing” policies

Discovery of liability potential / immature litigation

Page 28: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

28©Towers Perrin

Exposure-Based Analysis:(8) Ceded/Net Analysis

Best practice: directly reflect terms of outward reinsurance protections applied to gross loss estimates Model gross, ceded and net directly

However, some outward programs are too disparate / complicated to model

Some insurers can provide gross estimates to ceded reinsurance department

Common practice: review historical net / gross ratios by homogenous groupings Paid ratios may not be reflective of future

May be distorted by a few large accounts May not adequately reflect future cessions in excess-of-

loss programs

Consider reinsurance collectibility: commutations, insolvencies, disputes

Page 29: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

29©Towers Perrin

Exposure-Based Analysis:(9) Provision for Uncertainty

Range of estimates considers various scenarios / uncertainty Why have projections missed the mark in the past?

Choice of methods Data constraints Specific assumptions External environment

Unimpaired claimants Mass screenings Impact on settlements / compensation Dismissals Inactive dockets

“Jackpot” awards Bankruptcy

Pre-packs Accelerated payments

Expansion of “target” defendant list Reform efforts

Page 30: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

30©Towers Perrin

Portion of $200 billion Ultimate Loss and Expense – Retained, Net Insured U.S., Net Non-U.S.**

Net U.S.

Insured

30%*

Retained by

Defendants

39%

Net Non-

U.S. Insured

31%

*$60 billion mid-point of $55 – $65 billion range of the “Universe” of net liabilities to the U.S. P/C market.**Additional details available in Emphasis 2001/3, “Sizing Up Asbestos Exposure,” a publication of Tillinghast – Towers Perrin, at www.towers.com.

Page 31: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

31©Towers Perrin

Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability

0

10

20

30

40

50

60

70

80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

$ B

illio

ns

0

10

20

30

40

50

60

70

80

Estimated Ultimate Cost ($55 - $65 billion) Cumulative Paid ($28.2 billion at 2003)

Outstanding Case & IBNR ($22.2 billion at 2003)

Page 32: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

32©Towers Perrin

Recognition of Asbestos Liabilities

Gross Incurred Asbestos Loss and ExpenseCalendar Year 1998 - 2003: Ten Largest Increases

- 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500

Hartford Insurance Group

Travelers Prop Cas Group

ACE INA Group

CNA Insurance Companies*

American International Grp Inc*

White Mountains Insurance Grp

Allianz of America, Inc

Liberty Mutual Insurance Cos

Allstate Insurance Group*

Chubb Group of Insurance Cos*

Millions

CY Net Incurred

CY Ceded Incurred

Based on Note 29 Annual Statement data as of 12/31/2002 and public disclosures of reserve charges during 2003.*Note, for some companies 2003 gross (or ceded) amounts were not disclosed, so only the net amount is included.

Page 33: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

33©Towers Perrin

Recent Increases in U.S. Asbestos Liabilities

U.S. Insurers have increased asbestos reserves by at least $12 billion gross ($8 billion net) since the beginning of 2003 The Hartford – $4.0B gross, $2.6B net (May 2003) Travelers - $3.2B gross, $2.6B net (Jan 2003) ACE USA - $2.2B gross, $0.3B net A&E (Jan 2003) Swiss Re America - $520M gross, $458M net (Q4 2003) CNA - $517M net A&E (Q3 2003) Allstate - $514M net (Q2&Q3 2003) AIG - $440-450M net (Q4 2003) Liberty Mutual - $405M gross, $331M net (Q3 2003) Chubb $250M net (Q4 2003) Argonaut - $52.8m (Mar 2003)

Follows further significant increases in 2001 and 2002

Increased pressure on peers to make similar disclosures

Page 34: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

34©Towers Perrin

Recent Increases Abroad

Equitas (amounts in Sterling) £1.5B gross undiscounted (Q1 2000) £1.7B gross undiscounted (Q1 2001) No change as of Q1 2002 £0.4B gross discounted (Q1 2003) £0.3B gross discounted (Q1 2004)

Royal & Sun Alliance (amounts in Sterling) £371M for U.S. and U.K. (Feb. 2002) £150M for U.S. and U.K. (Sept. 2003) £500M for U.S. and U.K. (March 2004)

Page 35: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

35©Towers Perrin

Themes Underlying Insurer/Reinsurer Charges

Some companies recognized increases each year, others less frequently

Not all insurers included in the “dirty thirty” have increased reserves by a significant amount

Increases in anticipated cessions exceed increases in net amounts recognized by reinsurers Some reinsurance is non-U.S.

Page 36: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

36©Towers Perrin

Comparisons of Reserve Adequacy

Need an understanding of the method(s) utilized

Prior to 2002 insurer disclosures Guesswork Rules of thumb

Disclosures during 2003 Provided first details regarding ground-up exposure-

based analyses Specific assumptions underlying the actual analyses

are critical and many details are still not disclosed

Page 37: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

37©Towers Perrin

Manville Trust Recent Claim History

The Manville 2002 TDP is almost exactly the same as the TDPs in emerging and pending asbestos trusts

From October 1, 2003 through March 31, 2005, a period of 18 months, the CRMC received approximately 28,000 Manville Trust claims

In the first 9 months of 2003, the CRMC received approximately 90,000 Manville Trust claims

Why such a dramatic decrease in claim filings?

Source: David Austern, CRMC, April 6, 2005 ACI Meeting

Page 38: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

38©Towers Perrin

2002 Revised Manville Trust Distribution Process (TDP)

The 2002 Manville TDP differs from the 1995 TDP in the following ways There is a requirement of Significant Occupational Exposure (“SOE”) There is more stringent medical criteria under the 2002 TDP

An independent claims forecaster re-evaluated claims filed between 2000 and 2003 under the 1995 TDP to determine how the claims would have been settled if they had been filed pursuant to the 2002 TDP Expected annual claim payments decreased from (estimated) $146.8

million to $87.9 million Only one-third of the 1995 TDP claims filed in three of the major claim

categories met the SOE requirement A significant number of claims failed to meet the more stringent 2002

medical criteria Approximately 50% of the 1995 TDP claims were paid at the lowest

compensable value; when 2002 TDP criteria were employed, nearly 84% of the claims were paid at the lowest compensable value

Source: David Austern, CRMC, April 6, 2005 ACI Meeting

Page 39: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

39©Towers Perrin

What Are Potential Federal Solutions?

Asbestos-Related Bills Introduced into the 108th (2003-2004)Congress:

6 relating to asbestos reform HR1114 – Kirk (R-IL) – office of Asb. Comp./court HR1586 – Cannon (R-UT) – court HR1737 – Dooley (D-CA) – court S413 – Nickels (R-OK) – court S1125 / S2290 – Hatch (R-UT) – trust

2 to ban the use of asbestos HR2277 – Waxman (D-CA) S1115 – Murray (D-WA)

1 to change the tax code, such that asbestos-related settlement funds would be exempt from tax HR2503 – Collins (R-GA)

Page 40: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

40©Towers Perrin

Senate Bill 1125

Introduced May 2003

No Fault System

Initially called for a privately funded trust totaling $108 billion comprised of: Insurers - $45B Defendant companies - $45B Current bankruptcy - $4B Voluntary contributions - $14B

Funding contribution Insurers still negotiating; subject to insurer commission Defendants grouped to tiers based on historical payments

Separated into sub-tiers based on revenues

Page 41: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

41©Towers Perrin

Potential Insurer Allocation

Insurers include U.S. and Non-U.S. companies

Insurer funding is net of third party reinsurance Gross of financial cover

Initial discussions based on a blended approach Market share – premium and paid losses Future exposure – carried reserves

More recent discussions focused on an industry-wide ground-up study

Insurer funding is concentrated 12 insurers likely to contribute 75% 20 insurers likely to contribute 90%

Page 42: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

42©Towers Perrin

Initial Quantification of the Economic Impactof S1125 – 6/4/2003 Hearing

Is proposed Trust Fund of $108B adequate?

Tillinghast Projections Released May 2001: $200B Ultimate Loss & Expense Less $70B paid as of 12/31/2002 (est. by RAND) Equals $130B of 2003+ future payments

Reduced for frictional costs $61B expected to reach claimants Conclusion is consistent with RAND: transaction

costs have consumed more than half of total spending

Page 43: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

43©Towers Perrin

Initial Quantification of the Economic Impactof S1125 – 6/4/2003 Hearing

Reflect specific indemnity awards under S1125 Future claims to be be filed from 2003 - 2049 Pending claims to be re-filed Initially eight Disease Levels consistent with the

Manville 2002 TDP Specific awards by Disease Level

$0 for Levels I-II to

$750,000 for Level VIII (meso)

Tested various scenarios - all at or below $108B

Page 44: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

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Senate Bill 1125 - 2003 Compromises

S1125 passed out Senate Judiciary Committee on July 10, 2003 (10-8) with significant compromises Revised medical criteria – 10 Disease Levels Revised awards ($20,000 for Level II to $1 million

for Level X)

Department of Labor to process claims

Unresolved issues: Size of the fund Start-up / pending claims Finality / sunset provisions

Page 45: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

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Progression of Trust Fund (S1125 / S2290)

S2290 was an updated version of S1125 Introduced April 7, 2004 Frist funding - $124B Specter process agreements

Administrative structure

Expedited start-up

Expedited judicial review Modified sunset

Moratorium

Return to federal court

Page 46: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

46©Towers Perrin

Outcome of S2290

4/22/2004 – Senate did not obtain 60 votes needed to invoke cloture for debate before the full Senate 50 Yea / 47 Nay

5/6/2004 – Further negotiations mediated by Chief Judge Emeritus Edward Becker of the Third Circuit U.S. Court of Appeals ended without agreement Defendants / Insurers offer $116B + $12B

contingency = $128B Demand by AFL-CIO remains at $134B + $15B

contingency = $149B

However, Frist / Daschle continued to work toward a compromise

Page 47: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

47©Towers Perrin

Potential Size of the Fund

Compensation levels and projections of claim filings April 2004 CBO estimate = $140B over 50 years

Daschle late-June proposal of $141B(+$4B from existing trusts = $145B)

Frist mid-July proposal of $140B(=$136B + $4B from existing bankruptcy trusts)

September 2004 compromise reached at $140B NPV differs by ~$4B

Demand by AFL-CIO remains at $149B Insurers remain at 2003 offer of $46B

Page 48: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

48©Towers Perrin

Most Significant Outstanding Issues of S2290

Start -Up Daschle would allow most cases with a trial date to

proceed in court Frist would have all existing claims revert to the

fund, except where there has been a final judgment

Lung cancer claims Level VII: $500K Daschle v. $150K Frist

No finality Reversion to state and federal courts

Page 49: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

49©Towers Perrin

Efforts in the 109th (2005-2006) Congress

President Busch campaigns for asbestos reform Trips/speeches in Detroit and Madison County State of the Union

Specter holds Judiciary Committee HearingJanuary 11, 2005 Discussion draft released January 7, 2005 with

“blanks” Exxon Mobil, DuPont, Federal Mogul and others say

they would fare better under existing system AIA says draft bill “designed to fail” Group of insurers / defendants say draft “raises

serious concerns”

Page 50: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

50©Towers Perrin

Efforts in the 109th (2005-2006) Congress

February 2, 2005 Hearing regarding mixed-dust claims and “double-dipping” Medical experts agreed asbestos v. silica disease can be

distinguished Unlikely an individual would suffer diseases carried by both

substances Early-February Specter delays introduction of bill to garner GOP support,

at request of Frist Late February, describes process as balancing act between

Democrats and Republicans, but making progress March 1, Washington Times “If everyone insists on the last bit of

advantage, there will be no bill… Prompt compromises will have to be forthcoming if this critical legislation is to become law or relegated to the deep freeze.”

Frist has reserved time in early April (after 3/18 – 4/4 recess) for Senate consideration

S. Res 43 (H. Reid/Democrat/Nevada) designates April 1, 2005 as “National Asbestos Awareness Day”

Page 51: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

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State Reform Efforts

Efforts at federal reform have drawn attention to abuses in the current system (e.g., claims by the unimpaired)

Several states aren’t waiting for a federal solution and recently have enacted various reforms Mississippi New York Ohio Texas West Virginia

Page 52: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

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Will It End?

Legislative Reform Federal vs. one jurisdiction at a time

Will Ohio hold, Texas be enforced, ….?

How portable are the claims?

Judicial System Changes

Getting back to the basics Adequate discovery Trying cases

Page 53: ©Towers Perrin Michael E. Angelina, ACAS, MAAA Kevin F. Downs, FCAS, MAAA CAMAR - Spring 2005 Meeting Princeton, NJ June 2, 2005

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Fraudulent Claims

National Tire Workers Litigation Project – 1986 Group 1: 64% positive; Group 2: 95% positive Re-evaluated 439 cases: only 3.6% positive

Johns Hopkins Re-evaluated 551 films used as legal basis for claims Originally >90% positive drops to <5% positive

2/16-18/2005 Silica MDL Daubert Hearings – Judge Jack/Corpus Christi, TX >50% of 10K MDL claimants previously filed asbestos claims Doctors testified they weren’t qualified to make diagnoses;

didn’t authorize silica diagnoses Defense attorneys have requested $1.1M sanctions against

plaintiff attorneys; subject of 3/14/2005 hearing Judge Jack likely to remand cases to state court by end of

March