Asbestos Reserving Issues and Trends

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Asbestos Reserving Issues and Trends

• Kevin Madigan, MHL/Paratus
• September 23, 2002

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• The 5 Stages of Loss

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• The 5 Stages of Loss
• Denial
• Anger
• Bargaining
• Depression
• Acceptance

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• The 5 Stages of Loss
• Denial
• Anger
• Bargaining
• Depression
• Acceptance
• At which stage is the insurance industry?

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• 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.

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• EDITORIAL COMMENTS
• Underwriting catastrophe

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• EDITORIAL COMMENTS
• Underwriting catastrophe
• Asbestos has caused more cancer in the
  workplace than all other substances combined

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• EDITORIAL COMMENTS
• Underwriting catastrophe
• Asbestos has caused more cancer in the
  workplace than all other substances combined
• Smoking Gun Documents
• Expected and Intended?

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• EDITORIAL COMMENTS
• Underwriting catastrophe
• Asbestos has caused more cancer in the
  workplace than all other substances combined
• Smoking Gun Documents
• Expected and Intended?
• Kelly-Moore sues Dow and Union Carbide
• Subrogation?

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• More Comments
• Peripheral Defendants
• We were lazy

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• More Comments
• Peripheral Defendants
• We were lazy
• Brake linings can be up to 50 asbestos by
  composition

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• More Comments
• Peripheral Defendants
• We were lazy
• Brake linings can be up to 50 asbestos by
  composition
• Plaintiffs getting less money even though
  solvent defendants paying more

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• More Comments
• Peripheral 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

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• Lawyers
• Plaintiffs
• Defendants
• Policyholders Coverage Counsel
• Bankruptcy Experts
• Primary vs. Excess Carriers Coverage Counsel
• Reinsurance Disputes

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• Evaluating Liabilities
• Benchmarks what to do in a pinch

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• Evaluating Liabilities
• Benchmarks what to do in a pinch
• Survival Ratios (Ratio of reserves to average
  annual paid losses)

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• Evaluating Liabilities
• Benchmarks what to do in a pinch
• Survival Ratios (Ratio of reserves to average
  annual paid losses)
• IBNR to Case Ratios

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• Evaluating Liabilities
• Benchmarks what to do in a pinch
• Survival Ratios (Ratio of reserves to average
  annual paid losses)
• IBNR to Case Ratios
• Implied LDFs

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• Evaluating Liabilities
• Benchmarks 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

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• Evaluating Liabilities
• Benchmarks 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

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• Evaluating Liabilities
• More 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.

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• Evaluating Liabilities
• More appropriate method(s)
• DETAILS
• DETAILS
• DETAILS

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• Evaluating Liabilities
• More appropriate method(s)
• Talk and LISTEN, LISTEN, LISTEN to Claims
  professionals
• They know more about this than most of us ever
  will

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• Evaluating Liabilities
• More appropriate method(s)
• Talk and LISTEN, LISTEN, LISTEN to Claims
  professionals
• Gather information
• Nature of exposure and available insurance

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• Evaluating Liabilities
• More appropriate method(s)
• Talk and LISTEN, LISTEN, LISTEN to Claims
  professionals
• Gather information
• Use modeling skills to analyze the source of the
  exposure

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• Evaluating Liabilities
• More 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

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• Evaluating Liabilities
• More appropriate method(s)
• Exposure Analysis GROSS basis
• Direct
• Assumed (traditional) reinsurance
• Retrocessional Cover
• Analyze Ceded Losses Separately
• Collectibility Issues
• Commutations

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• Evaluating Liabilities
• Direct Insurance
• Ground-Up analysis of insureds liabilities
• stochastic if possible
• Future Frequency and Severity
• How Many More Years?
• Allocation to past Policy Years
• Knowledge of performing coverages
• Primary vs. Excess
• Number of Occurrences
• Push through insurance program to calculate GROSS
  liabilities
• Insolvents, SIRs, bare years
• Products vs. Non Products (Limits!)
• Pure IBNR
• Lots of judgment

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• Evaluating Liabilities
• Assumed Reinsurance
• Ground-Up is harder to pull off due to data
  issues (e.g. coverage)
• Top-down analysis of Gross liabilities
• Cedant reserving and reporting patterns
• Source of loss to cedant (original insureds)
• Recent Annual Average billings paid and case
• Prior consumption of coverage
• Known, but unreported, potential risks
• Lots of judgment

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• Evaluating Liabilities
• Retrocessional Cover
• Two options
• Exhaustive and expensive study
• Understand the mechanics and participants and do
  a bulk study
• Lots of judgment

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

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• Evaluating Liabilities
• Talk and LISTEN to Claims professionals, then
  apply modeling skills to produce distributions of
  IBNR.
• Thin data lots of uncertainty.

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• 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