Insurers Report Progress on Asbestos Liabilities Funding, Says A.M. Best

March 27, 2006

During 2004, U.S. property/casualty insurers narrowed the funding gap in their asbestos and environmental loss reserves, principally for asbestos liabilities, as a result of 2004’s pretax charge of nearly $6 billion, according to a special report published by A.M. Best Co.

Total A&E losses incurred by the industry since 2000 have totaled more than $26 billion, of which $24 billion was for asbestos losses alone. As a result, A.M. Best’s year-end 2004 estimate of unfunded asbestos and environmental liabilities for the U.S. property/casualty industry is $10 billion (asbestos) and $24 billion (environmental), for a total funding shortfall of $34 billion.

While total funding levels have improved significantly from 2001’s $53 billion shortfall, essentially all of this improvement has occurred on the asbestos side of the A&E equation. Furthermore, a significant number of insurer groups remain under funded by relatively wide margins. This is particularly true when measuring insurers’ environmental reserve adequacy. A.M. Best’s view of industry funding levels continues to be centered on estimates of ultimate industry losses of $65 billion and $56 billion for asbestos and environmental, respectively.

Asbestos losses accelerated rapidly in the late 1990s and early 2000s, peaking at $8 billion in 2002 before retreating somewhat in more recent years when the industry incurred $6 billion (2003) and less than $4 billion (2004) in asbestos losses. In addition, the industry’s trend in net paid losses continues its upward march by wide margins. Loss payouts grew 23% during 2004, capping three years of extraordinary annual growth rates in excess of 20% per annum. Prior to 2001, asbestos payouts typically had been very close to $1.3 billion per year (normalized for Fibreboard).

A.M. Best said that some of the more significant drivers behind the escalating asbestos losses include:

A large number of bankruptcies among major asbestos producers;
The spread of litigation to peripheral defendants;

Reclassification of some previously settled products liability cases as policyholders seek to reopen otherwise exhausted sublimits for future product liability claims while simultaneously obtaining higher limits of coverage under the nonproducts portion of their general liability policies for their “former” products claims;

The collapse of a number of payment schemes previously agreed to by plaintiffs, insureds and insurers;

Packaging of numerous asymptomatic plaintiffs with a handful of seriously ill plaintiffs as leverage against defendants (and their insurers); and
A rise in the number of asbestos practices among plaintiffs’ attorneys.

As of year-end 2004, A.M. Best estimated incurred-to-date losses for the industry of $55 billion (asbestos) and $32 billion (environmental). This analysis is based on A.M. Best’s review of year-end 2004 Footnote 33 data, supplemented with A.M. Best’s proprietary data, including prior-year footnote data reaching back to and including 1991 (the oldest year with available NAIC annual statement A&E data).


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