Understanding Asbestos Liability Changes Seminar

1. Casualty Actuarial SocietySeminar on ReinsuranceConcurrent Session: Current EventsChanges in Asbestos Liability June 15-16, 2000 Jennifer L. Biggs, FCAS, MAAA Tillinghast – Towers Perrin

2. Asbestos Liability • Asbestos is not a done deal • Filings are continuing • Unanticipated changes will affect insurer and reinsurer liabilities

3. Asbestos Liability • Some History… • What’s Happening Today? • General Observations in the U.S. • Around the World

4. What is Asbestos? • Naturally occurring fibrous mineral with a crystalline structure, containing long chains of silicon and oxygen • flexible • strong • durable • fire resistant • separable into filaments

5. Types of asbestos • Six types • amphibole types • actinolite • amosite (brown asbestos) • anthophylite • crocidolite (blue asbestos) • tremolite • serpentine fiber • chrysotile (white asbestos) • Chrysotile: 90% of asbestos production; 95% of asbestos in place in U.S. buildings; thought to be less dangerous than amphibole types.

6. Products containing asbestos • Used historically in a wide variety of products, including: • yarn, thread, felt, rope packing, flame resistant cloth • steam gaskets and packings, plain and corrugated paper, rollboard, millboard, high temperature insulation, movie props • World War II Ship Building • molded brake linings, brake blocks, filler in plastics, flooring, pottery, insulated wire, pipe covering • brake shoes, clutch facings, cement, plaster, stucco, shingles, siding, tile, sewer pipes, blocks • corrugated roofing, roof sheathing, roofing cement • boiler insulation; insulation of walls, floors, mattresses • paints, varnishes, filter fibers, filter pads

7. Asbestos Usage: • Peak of ~1 million tons of asbestos used in the U.S. in 1973 • Exposure and use limits not established in the U.S. until the creation of OSHA in 1970 • EPA issued ban on most forms of asbestos in 1989 • Asbestos is still used today in several products, including: • U.S. Navy submarines • chlorine production • Space shuttle • jointing and gaskets; asphalt coats and sealants • some paper, plastics, cement piping, roofing and shingles

8. Cause of Disease • Occupational Exposure • Recognized as a cause of disease since 1920s; universally accepted since 1930s • Long latency: 10-25 years or more • Typical American breathes ~1 million fibers per year via natural and man-made sources

9. Types of Diseases • Plueral plaques • Asbestosis • Lung & other cancers • Mesothelioma

10. Initial Litigation • First suit filed in Beaumont, TX in 1966 • Lawyer won $79,000 in second case in 1969 • Landmark case: Borel v. Fibreboard filed 1970; decided 1973 • March 1980 TX jury awarded $2.6M to widow of insulation worker • By October 1981 evident that U.S. Courts maximizing insurance coverage for asbestos producers • By 1982, producers began declaring bankruptcy

11. Bankruptcies / Limited Trusts / Other Settlements • More than 15 asbestos defendants now bankrupt • National Gypsum filed bankruptcy in 1993 • expecting $2.3B in claims • trust funded with only $138M from National Gypsum and $380M from insurers • $4.5B Dow Corning bankruptcy plan approved 12/1999 (SBI) • Babcock & Wilcox filed bankruptcy 2/22/2000 • due to demands for higher settlements in asbestos claims • 45,000 claims pending • Owens Corning established National Settlement Program (NSP) in 12/1998 • resolved 90% of pending claims (176,000); average $4,600 per claim • established fixed payments for future claims without litigation • private agreement between OCF and plaintiffs counsel (~100 firms) requires no court approval • plaintiffs lawyers promise to hold off on filing new claims until 2001 (catch up on backlog)

12. Wellington Agreement • Signed 6/19/1985 after 3 years of negotiation by 34 former asbestos producers and 16 insurers • Established Asbestos Claims Facility (ACF) • private, non-profit corporation funded through insurance proceeds • provide efficient, equitable, predictable alternative to the tort system to file and evaluate asbestos-related bodily injury claims • reduce legal expenses • settled insurance coverage disputes • cost-share formula based on each producer’s previous litigation experience • Wellington agreement benefits primary insurers more than reinsurers

13. Center for Claims Resolution (CCR) • Withdrawal from ACF triggered by disagreements regarding allocation of claims • emergence of new defendants • Establish CCR 10/1988 with more flexible allocation formula and more aggressive settlement philosophy; votes weighted based on share of liability • CCR members are defendants only (no insurers) • Like the ACF, the CCR provided claims handling services, systems support, allocates costs for settlement and bills insurers

14. Georgine v. Amchem v. Admiral • CCR Futures Deal • proposed settlement to Georgine case • $1.3B settlement regarding worldwide exposure of 20 companies • allows opt-outs • Dismissed 6/27/1997 • absentee interests (i.e., future claimants) inadequately represented • fails to satisfy requirement of adequacy of representation by named plaintiffs • resulted in flood of new claims against CCR companies • Court calls for legislative solution • Ginsburg: “… a nationwide administrative claims processing regime would provide the most secure, fair, and efficient means of compensating victims of asbestos exposure… Congress, however, has not adopted such a solution.”

15. Fibreboard • Ahearn; Ortiz v. Fibreboard • 1993: $1.535B settlement of 186,000 pending plus future asbestos personal injury claims against Fibreboard • 1993: Trilateral Agreement - $2B back-up plan funded by insurers in case global settlement not approved • CNA: Continental Casualty • Chubb: Pacific Indemnity • Fifth Circuit and Court of Appeals approved class certification on a “limited fund” rationale • Settlement ultimately rejected • excluded some potential plaintiffs • fairness of distribution • conflicting interest of class • court should have given more consideration to Fibreboard’s financial condition • ability to pay • potential insurance funds • Dismissal places new restrictions on limited-fund class actions; expected to result in more bankruptcies • Court again calls to Congress for a solution

16. Proposed Legislation • Establish Asbestos Resolution Corp. • pros: unclog court system, expedite process, more victims get compensation quickly, weed out bogus claims (plaintiffs not sick, or illness not caused by asbestos), eliminate state statute of limitations, 25% cap on fees to plaintiff’s lawyers, set up “Office of Asbestos Compensation” for out of court settlements • cons: unreasonable medical criteria deny thousands from making claims, unfairly caps damage amounts, actually takes longer than court system to compensate, can’t collect punitive damages • House and Senate bills: Fairness in Compensation Act • HR1283 approved by House Judiciary Committee by 18-15 vote on 3/16/2000. • S758 (introduced March 1999) currently in Senate Judiciary Committee • Supported by “Coalition for Asbestos Resolution” led by GAF Corp. • GAF spent >$7.1M paying >35 lobbyists since 1997 • Opposed by the White House, Association of Trial Lawyers of America, AFL-CIO, Owens Corning

17. Lawyers’ Activities • Asbestos specialty firms • Canvassing unions; surge of non-malignant claims • Routinely bundle severe claims with non-malignant claims for settlement • New Claims • Household exposure claims • Second Injury Claims • Medical Monitoring Claims

18. Texas / Mississippi • Texas • Prior to 1997 suits from out of state were limited, with the exception of those pertaining to railroads, airlines, and asbestos • Since 1997, annual number of filings in Texas has declined, but not as much as expected • Mississippi • offers procedural advantages: • juries rarely rule against the plaintiff • defendant doesn’t have right to perform medical exams • no provision for class actions, but able to join large groups of individuals with very different claims, and settlements of individual cases don’t require approval by a judge and aren’t made part of the public court process • can add claimants to a suit with no relation to the state, but with similar injuries

19. Rate of Filing (in 000s)

20. Losses from Note 27 Adverse Asbestos Development by Year (Net) U.S. P/C Insurers *excludes Fibreboard

21. Losses from Note 27 Asbestos Liabilities Current Funding LevelUS Insurance Industry – Net Based on Tillinghast Estimates

22. Recognition and Disclosure • Rating Agencies • Regulators • SEC • BODs • Investment Analysts • Banks

23. Top Ten Asbestos Reserve Additions — 1998

24. Asbestos reserve development has been somewhat concentrated Cumulative Adverse Asbestos Development since 1993 (Net)

25. Asbestos reserves relative to surplusby size group Net Asbestos Reserve as Percentage of Surplus Groups with Footnote 26 Disclosures

26. Asbestos reserves relative to total reservesby size group Ratio of Net Asbestos Reserves to Total Net Reserves Groups with Footnote 26 Disclosures

27. Asbestos drag on combined ratio by size group Impact on Combined Ratios Ratio of Net Asbestos Incurred to Net Earned Premium Groups with Footnote 26 Disclosures

28. What’s Happening Today? • Continued emergence of peripheral defendants • Roll-forward of initial coverage blocks • Products reclassification

29. Products Reclassification • Asbestos claims have traditionally been filed under the products coverage of CGL policies • some property damage: concentrated for a few manufacturers • some premises: Tillinghast’s “Tier 4” defendants • Two courts have ruled that non-products unaggregated GL coverage applies to claims against insulation contractors • Now, traditional products defendants with insulation activities that have exhausted products coverage are attempting to obtain additional insurance coverage by reclassifying claims that were previously paid under products limits as premises/operations.

30. Products Reclassification • If reclassification successful • reinstate portion of previously exhausted products limits • make available premises/operations coverage • Limits on premises/operations coverage? • Premises/operations coverage generally doesn’t have aggregate limit • may reflect aggregate limit if subject to Wellington

31. Asbestos Problem/Potential Solutions Asbestos Problem for Insurers • large underlying cost • many exposed policies • judicial climate favoring plaintiffs Potential Solutions • Reinsurance Placements • T&N • Restructuring • Equitas • CIGNA

32. Quotes from Clients • “The claims are continuing” • “Claim filings have remained steady; we expected a decrease by now.” • “Asbestos is the energizer bunny of toxic torts; it keeps going and going and going...” • “We are seeing operations claims from new defendants (contractors, distributors)” • We’ve been approached by producers seeking finite cover. The cover might be a positive influence on financial analyst opinions … The defendants must anticipate that filings will continue … A small number of deals are being done.” • “Asbestos litigation is a profit-driven industry.” • “Don’t think of them as lawyers, think of them as venture capitalists.”

33. Asbestos around the World Largest Consumers, 1994 (in metric tons) Largest Producers, 1996 (in metric tons)

34. Asbestos around the World • World production has declined significantly since 1973 • 1973 approximately 5.1 million metric tons • 1996 approximately 2.3 million metric tons • In past two decades, consumption has increased dramatically in many developing countries Consumption (in metric tons) 1970 1994 Growth Thailand 21,000 164,000 781% India 51,000 123,000 241%

35. Asbestos in Developing Countries • Consumption has increased but safety precautions have not been implemented. • Why the increase? • low cost • high quality • immediate health benefits for the consumer • suited to the economics of poor countries • Why the lack of safety precautions? • Lack of awareness • apathetic governments • Implications: • According to epidemiologist Julian Peto, the surge in use “will result in several million cancer deaths over the next 30 years” • By comparison, over past 30 years USA has had 171,500 premature asbestos-related cancer deaths

36. Asbestos in Europe • European Union banned amphibole types of asbestos in 1991. Chrysotile banned 9/27/99; to be fully implemented by 1/1/2005. • Belgium — claims filed under workers compensation system • France — asbestos use prohibited effective 1/1/1997 • Italy — asbestos use prohibited in 1992 • claims to be paid by The Italian National Security (INAIL), employers (compulsory EL coverage), and insurers • Netherlands — 1997/1998 creation of the Institute for Asbestosis

37. Current Events: Asbestos Liability • Changes in Asbestos Liability: Have recent court decisions and procedural changes altered the number and type of claims, as well as the way in which they are presented to insurers and reinsurers?

38. Bibliography A.M. Best Note 27 Data Alleman, James E. and Mossman, Brooke T., “Asbestos Revisited,” Scientific American, July 1997, p. 70. “As the Asbestos Crumbles,” Hofstra Law Review, Summer, 1992, 20 Hofstra L. Rev. 1139. Borel v. Fibreboard, United States Court of Appeals for the Fifth Circuit, No. 72-1492, September 10, 1973. Bouska, Amy S. and Cross, Susan L., “A Mass Tort or a Mass of Torts?” Emphasis, 1997/3, p. 10. Bouska, Amy S. and Miller, Philip D., “The ‘Loser’ – and Still Champion?” Emphasis, 1999/2, p. 2. Broderick, Kathryn P., Kay, Kenneth R., and Stirn, James R., “A Bad Deal for Reinsurers,” Best’s Review, January 1989, p. 42. Bryant, Arthur H. and Bueckner, Leslie A., “Commentary,” Mealey’s Litigation Report: Asbestos, 7/16/99, Vol. 14, #12, p. 32. Cauchon, Dennis, “The Asbestos Epidemic (4 Part Series), USA Today, February 9, 1999. Cauchon, Dennis, “The Asbestos Epidemic (4 Part Series), USA Today, February 11, 1999. Centola, Gary D., “Commentary,” Mealey’s Litigation Report: Asbestos, 8/6/99, Vol. 14, #13, p. 39. Chalasani, Radhika, “The Asbestos Epidemic (4 Part Series), USA Today, February 8, 1999. Cross, Susan L. and Doucette, John P., “Measurement of Asbestos Bodily Injury Liabilities,” Proceedings of the Casualty Actuarial Society, 1997, Vol. LXXXIV, p. 187. “Despite State Tort Reform, Asbestos Litigation Thrives,” Texas Journal, October 27, 1999. Dew, Ted, “Will Lead Poison U.S. Insurers,” Emphasis, 1997/2, p. 10.

39. Bibliography http://congress.nw.dc.us/cqi-bin/thomassearch.pl?dir=congressorg2&term=asbestos Labaton, Stephen, “How a Company Lets Its Cash Talk,” The New York Times/Money & Business, October 17, 1999. Mealey’s Litigation Report: Asbestos • 7/7/1997, Vol. 12, #1 • 5/1/1998, Vol. 13, #7, p. 12. • 5/7/1999, Vol. 14, #7, p. 23. • 8/6/1999, Vol. 14, #13, p. 33. • 3/17/2000, Vol.15, #4, p. 6. • 5/5/2000, Vol. 15, #7, p. 14. • and various other volumes Morello, Carol, “The Asbestos Epidemic (4 Part Series), USA Today, February 10, 1999. Ortiz v. Fibreboard, United States Supreme Court No. 97-1704, Decided June 23, 1999. Vandehei, Jim, “Asbestos – Claims Bill Battle Heats Up with Attack on GOP Legislative Backers,” The Wall Street Journal, February 22, 2000, p. B32. Warren, Susan, “Asbestos Suits Target Makers of Wine, Cars, Soups, Soaps,” The Wall Street Journal, April 12, 2000. Werder, Jr., Richard I., “Commentary,” Mealey’s Litigation Report: Asbestos, 9/3/99, Vol. 14, #15, p. 30.