A.M. Best produces a very informative report on the A&E liabilities of U.S. insurers every year. The most recent report, issued last month and based on 2013 financial data, contains useful information for anyone looking to better understand these liabilities — providing insight into insurer and industry financials and claim trends.
I’ve summarized some of what I found to be the more interesting items, along with a few of our own observations and thoughts:
- A.M. Best estimates the industry’s ultimate net liabilities as $85B for asbestos and $42B for environmental.
- Compared to current industry reserves, this represents unfunded liability of $7B for asbestos and $4B for environmental.
- These seem to be reasonably low deficits but are interesting in the context of recent actions by Travelers, Hartford and Liberty Mutual to increase their asbestos reserves.
- Total A&E incurred losses (paid claims plus reserves) have increased in five of the last seven years, including a 16% increase in 2013.
- Five insurer groups, three of which have engaged in loss portfolio transfers with Berkshire Hathaway’s National Indemnity, represented 50% of the 2013 incurred losses.
- Asbestos losses are at the higher end of what has been experienced since 2006.
Noteworthy Asbestos Items
- The Garlock matter, along with the November 2014 election results, may help to push forward the Furthering Asbestos Claim Transparency (FACT) Act. The Act amends federal bankruptcy law concerning asbestos-related bankruptcy trusts to require that quarterly reports be filed with the bankruptcy court that describe each demand the trust has received from a claimant, the basis for any payment made to that claimant, and information regarding the payment.
- The volume of lung cancer claims continues to grow after a period of decline.
- Studies show an increased likelihood of developing cancer in those exposed to both asbestos and tobacco.
- Plaintiff attorneys have seen success arguing that asbestos is at least a contributing factor in cases where the claimant was/is a smoker.
- If 2% to 5% of new lung cancer claims are attributable to asbestos (presumably in whole or in part), that would be 3,000 to 5,000 new cases annually.
Noteworthy Environmental Items
- There continue to be very large new claims and settlements.
- There have been a number of relevant court decisions in recent years:
- Pollution exclusions have been narrowed or found to be ambiguous.
- A duty to defend was upheld where the policy incepted after the insured’s polluting activities.
- The stacking of policies is allowed within an all sums context.
- A finding that each distinct cause of contamination at each site is a separate occurrence.
- Many cleanup standards have become stricter and government has been more aggressive, making additional activity and litigation more likely.
- Asbestos claim counts, losses, and loss estimates are unlikely to decline given latency periods, the size of the affected population, the increase in lung cancer claims, and recent court decisions.
- A significant share of asbestos losses are consolidated within Berkshire Hathaway’s NICO but the accounting for the losses for both the cedant and NICO is complicated and can make the financial data misleading on its surface.
- Although the insurance industry may be well positioned for any increase in environmental claims due to previous buybacks and settlements, the threat of large environmental liabilities continues to loom over policyholders.
Click here to purchase the full report, with data, at A.M. Best’s web site.