One long-standing issue that has to be included in any year-end roundup/2007 outlook for the property & casualty insurance industry is asbestos litigation.

There were several important developments in 2006. Bankruptcies among asbestos defendants continued, with the March filing of a major defendant (Dana Corporation). Reserve strengthening at several insurers and further delays in federal legislation gave 2006 the profile of nearly every other year over the last decade.

October held a big surprise, however, with the announcement of a major reinsurance deal between Berkshire Hathaway and Equitas. The prevailing view was that when Warren Buffet takes a huge bet on asbestos, something must be changing.

The change is not hard to detect. Reported claims have fallen sharply. New claims in 2006 ran about half the 2005 rate - just as 2005 claims were half of 2004 and 2004 claims were half of 2003. Claims in 2006 for many defendants were roughly oneeighth of those from just a few years ago.

The notorious late-1990s/early-2000s claims spike has ended. Tort reform in several states, favourable judicial rulings and tougher claims standards are the likely causes. Non-malignant (defendants and insurers would say “unimpaired”) claims drove the spike. A decline in these kinds of claims should lead to fewer disputes.

Claim settlements and paid dollars are also down, for many of the same reasons. Thus Berkshire's willingness to take on Equitas risk. It is widely believed that a turning point has been reached. But asbestos analysts have posited turning points many times in the past, reminding one of Paul Samuelson's observation that: “Wall Street indexes predicted nine out of the last five recessions.”

What comes down must have gone up…

The good news regarding claim volume must be tempered first by the realisation that what comes down must have gone up. Claims doubled three times from the early 1990s until 2003, so the 2006 claiming rate now resembles the early 1990s. It's worth bearing in mind how shocked the industry was by the number of asbestos claims back then.

A second note of caution: the claims remaining may be the more serious ones. Claim severity may rise and the percentage zero dollar claims may fall. Malignant cases have always been linked to a majority of dollars paid, so the savings to defendants will not be proportional to the drop in reported claims.

Recent studies done by the actuarial department at Alan Gray Inc. suggest that the average plaintiff age at filing is 70. The distribution is fairly tight, with two-thirds of all claimants between 60 and 80. There are still many occupationally-exposed baby boomers who will soon be moving into this danger zone.

Actuaries and other insurance industry experts like to see trends. The 2007 year could follow the trend of the past few years and bring yet another halving in the rate of claims. The falloff in asbestos production of the early 1970s by itself implies a sharp drop in claims now. Demographic forces, however, may be at work in the opposite direction. All in all, we see a plateau for 2007 and the immediate future, but the possibility of a second turning point, upwards, cannot be ruled out. We expect further reserve strengthening during 2007, as the leveling off of claims gives insurers room to play catch up. Continued pressure from Sarbanes-Oxley rules and state regulators will push companies toward reserve adequacy.

This Feature item appeared in issue 111 of JTW News - December - January 2006

Author: Thomas Toce - FCAS