The Asbestos and Environmental Actuarial Challenge
The insurance industry was found to have exposure to asbestos and environmental losses through a series of law suits where coverage was held not to have been excluded. Insurance companies have since changed their language to specifically exclude A&E, but they are still being hit on former policies.
Estimating asbestos and environmental exposures has long been the problem child of property and casualty actuarial science due to the lack of traditional methods that could be used. A particular difficulty with the estimation of asbestos reserves is the extent to which it relies on judicial decisions with little precedent. Jurisdictions that were once seen as plaintiff-friendly have now become much less so – so much so that plaintiff attorneys are relocating to new plaintiff-friendly locations. Fraud has been a big problem so exactly how the law develops in these newer jurisdictions remains to be seen.
With asbestos, there appears to be a “chicken-and-egg” problem. A rating agency will come up a conservative estimate of the ultimate insurance company exposure to asbestos claims, partially based on insurance companies own studies. An insurance company will see the increased estimate, and extrapolate from them that their own reserves may not be sufficient, and therefore increase their reserves. The rating agency will see this reserve strengthening, and in turn increase its own estimates – a classic “race-to-the-top” if you will. In terms of environmental, Merlinos brought its estimated ultimate exposure to $40 billion at year end 2006 based on a variety of factors, including advancements in technology that reduced the cost of clean-up. AM Best reduced its estimated ultimate to $40 billion in December 2009.
At Merlinos, we use a combination of industry-based methods and the opinion of an insurance company’s claim handlers where the book of outstanding claims has been clearly defined. We also research the topic through purchasing actuarial studies, and reading articles written by other knowledgeable sources (such as attorneys).
Merlinos has a lot of experience dealing with asbestos and environmental issues from working with state insurance departments on financial examinations, especially of troubled companies. This gives us the advantage of seeing how other actuaries treat these issues, allowing us to keep on top of best practices. We continue to monitor the industry’s asbestos exposure as commutation activity increases.
Do you think the industry is over-reserved, under-reserved or “just-right?” By when do you think the industry will have a clear grip on its exposures? People talk about other latent injury’s as being “the new asbestos” while others say that nothing like asbestos will ever happen to the industry again. What’s your opinion?
Michael Solomon, FCAS, MAAA, is a consulting actuary at Merlinos & Associates.
