1. ©Towers Perrin Emerging and Latent Risks for Commercial Liability CAS Ratemaking Seminar New Orleans March 11, 2005 Jennifer L. Biggs, FCAS, MAAA

2. ©Towers Perrin 2 Update on Latent Risks Asbestos Silica Pollution

3. ©Towers Perrin 3 Asbestos Concerns in the Current System Potential Solutions

4. ©Towers Perrin 4 Concerns in the Current System (1) Plaintiffs should demonstrate injury to file a claim The number of claim filings has increased dramatically  2003 claim filings against the Manville Trust exceeded 100,000 Fewer than 10% of claims are malignant Per RAND, ⅔ to ¾ are unimpaired The right to seek recovery if/when an injury manifests should not be limited Each claim should stand on its own merit Restrictions on mass consolidations Venue should be controlled Avoid forum shopping in “magic jurisdictions”

5. ©Towers Perrin 5 Surge in Claim Filings Note: Excludes Non-U.S. claims

6. ©Towers Perrin 6 Evidence of Forum Shopping 100 80 60 40 20 0 Percent Other states NY OH TX MS IL WV MD NJ PA CA Source: RAND, January 2003

7. ©Towers Perrin 7 Concerns in the Current System (2) A low percentage of total payments have reached the claimants. Per RAND: 30% - defense transaction costs 29% - plaintiff attorney fees and legal costs 41% - to claimants Resources are limited 77 defendant companies have sought bankruptcy protection But defendant pool has increased to ~8,400 Future sick may not be compensated

8. ©Towers Perrin 8 Number of Asbestos Related Bankruptcies per Year While only five bankruptcy petitions were filed during each of 2003 and 2004, the reduced level should not be misinterpreted as a sign of improvement in the asbestos litigation crisis. Rather, the number of 2003-2004 petitions was likely lower as defendants delayed decisions as they awaited the outcome of federal reform efforts. Note: Graph excludes a bankruptcy in 1976.

9. ©Towers Perrin 9 What Are Potential Federal Solutions? Asbestos-Related Bills Introduced into the 108 th (2003-2004) Congress: 6 relating to asbestos reform HR1114 – Kirk (R-IL) – office of Asb. Comp./court HR1586 – Cannon (R-UT) – court HR1737 – Dooley (D-CA) – court S413 – Nickels (R-OK) – court S1125 / S2290 – Hatch (R-UT) – trust 2 to ban the use of asbestos HR2277 – Waxman (D-CA) S1115 – Murray (D-WA) 1 to change the tax code, such that asbestos-related settlement funds would be exempt from tax HR2503 – Collins (R-GA)

10. ©Towers Perrin 10 Senate Bill 1125 Introduced May 2003 No Fault System Initially called for a privately funded trust totaling $108 billion comprised of: Insurers - $45B Defendant companies - $45B Current bankruptcy - $4B Voluntary contributions - $14B Funding contribution Insurers still negotiating; subject to insurer commission Defendants grouped to tiers based on historical payments  Separated into sub-tiers based on revenues

11. ©Towers Perrin 11 Potential Insurer Allocation Insurers include U.S. and Non-U.S. companies Insurer funding is net of third party reinsurance Gross of financial cover Initial discussions based on a blended approach Market share – premium and paid losses Future exposure – carried reserves More recent discussions focused on an industry-wide ground-up study Insurer funding is concentrated 12 insurers likely to contribute 75% 20 insurers likely to contribute 90%

12. ©Towers Perrin 12 Initial Quantification of the Economic Impact of S1125 – 6/4/2003 Hearing Is proposed Trust Fund of $108B adequate? Tillinghast Projections Released May 2001: $200B Ultimate Loss & Expense Less $70B paid as of 12/31/2002 (est. by RAND) Equals $130B of 2003+ future payments Reduced for frictional costs $61B expected to reach claimants Conclusion is consistent with RAND: transaction costs have consumed more than half of total spending

13. ©Towers Perrin 13 Initial Quantification of the Economic Impact of S1125 – 6/4/2003 Hearing Reflect specific indemnity awards under S1125 Future claims to be be filed from 2003 - 2049 Pending claims to be re-filed Initially eight Disease Levels consistent with the Manville 2002 TDP Specific awards by Disease Level  $0 for Levels I-II to  $750,000 for Level VIII (meso) Tested various scenarios - all at or below $108B

14. ©Towers Perrin 14 Senate Bill 1125 - 2003 Compromises S1125 passed out Senate Judiciary Committee on July 10, 2003 (10-8) with significant compromises Revised medical criteria – 10 Disease Levels Revised awards ($20,000 for Level II to $1 million for Level X) Department of Labor to process claims Unresolved issues: Size of the fund Start-up / pending claims Finality / sunset provisions

15. ©Towers Perrin 15 Progression of Trust Fund (S1125 / S2290) S2290 was an updated version of S1125 Introduced April 7, 2004 Frist funding - $124B Specter process agreements  Administrative structure  Expedited start-up  Expedited judicial review Modified sunset  Moratorium  Return to federal court

16. ©Towers Perrin 16 Outcome of S2290 4/22/2004 – Senate did not obtain 60 votes needed to invoke cloture for debate before the full Senate 50 Yea / 47 Nay 5/6/2004 – Further negotiations mediated by Chief Judge Emeritus Edward Becker of the Third Circuit U.S. Court of Appeals ended without agreement Defendants / Insurers offer $116B + $12B contingency = $128B Demand by AFL-CIO remains at $134B + $15B contingency = $149B However, Frist / Daschle continued to work toward a compromise

17. ©Towers Perrin 17 Potential Size of the Fund Compensation levels and projections of claim filings April 2004 CBO estimate = $140B over 50 years Daschle late-June proposal of $141B (+$4B from existing trusts = $145B) Frist mid-July proposal of $140B (=$136B + $4B from existing bankruptcy trusts) September 2004 compromise reached at $140B  NPV differs by ~$4B Demand by AFL-CIO remains at $149B Insurers remain at 2003 offer of $46B

18. ©Towers Perrin 18 Most Significant Outstanding Issues of S2290 Start -Up Daschle would allow most cases with a trial date to proceed in court Frist would have all existing claims revert to the fund, except where there has been a final judgment Lung cancer claims Level VII: $500K Daschle v. $150K Frist No finality Reversion to state and federal courts

19. ©Towers Perrin 19 Senator Feinstein’s Draft 2004 Proposal Draft Proposal $144B Fund (including existing trusts) Would require pending cases to be funneled into the trust fund  Except those with verdicts or enforceable settlements  Sickest could return to court if not operational in 90 days Non-starter for defendants / insurers Accelerated contributions No workers compensation carveout No finality - claims revert to court if trust runs out

20. ©Towers Perrin 20 What are the 2005 Prospects for Federal Legislation? Factors to consider Elections  President Bush re-elected  Republicans gain 4 seats in the Senate  Specter heads Senate Judiciary Committee  Daschle not re-elected Defendant / insurer commitment?  Back peddling  Other priorities (e.g., TRIA)  Resources

21. ©Towers Perrin 21 Efforts in the 109 th (2005-2006) Congress President Busch campaigns for asbestos reform Trips/speeches in Detroit and Madison County State of the Union Specter holds Judiciary Committee Hearing January 11, 2005 Discussion draft released January 7, 2005 with “blanks” Exxon Mobil, DuPont, Federal Mogul and others say they would fare better under existing system AIA says draft bill “designed to fail” Group of insurers / defendants say draft “raises serious concerns”

22. ©Towers Perrin 22 Efforts in the 109 th (2005-2006) Congress February 2, 2005 Hearing regarding mixed-dust claims and “double- dipping” Medical experts agreed asbestos v. silica disease can be distinguished Unlikely an individual would suffer diseases carried by both substances Early-February Specter delays introduction of bill to garner GOP support, at request of Frist Late February, describes process as balancing act between Democrats and Republicans, but making progress March 1, Washington Times “If everyone insists on the last bit of advantage, there will be no bill… Prompt compromises will have to be forthcoming if this critical legislation is to become law or relegated to the deep freeze.” Frist has reserved time in early April (after 3/18 – 4/4 recess) for Senate consideration S. Res 43 (H. Reid/Democrat/Nevada) designates April 1, 2005 as “National Asbestos Awareness Day”

23. ©Towers Perrin 23 State Reform Efforts Efforts at federal reform have drawn attention to abuses in the current system (e.g., claims by the unimpaired) Several states aren’t waiting for a federal solution and recently have enacted various reforms Mississippi New York Ohio Texas West Virginia

24. ©Towers Perrin 24 State Reform Efforts Focus on medical criteria / statute of limitations Medical criteria established in Ohio Inactive dockets being considered / created in several jurisdictions (e.g., Boston, NYC, Syracuse, Seattle, Madison County, IL) Penalties for frivolous lawsuits (e.g., MS, TX) Focus on forum shopping / consolidations (e.g., MS, TX, WV) Focus on joint and several liability (e.g., NY) Other issues: innocent sellers, successor liability, caps on non-economic and punitive damages

25. ©Towers Perrin 25 Will It End? Legislative Reform Federal vs. one jurisdiction at a time  Will Ohio hold, Texas be enforced, ….?  How portable are the claims? Judicial System Changes Getting back to the basics Adequate discovery Trying cases

26. ©Towers Perrin 26 Silica Update Diseases Silica Claim Filings Fraudulent Claims

27. ©Towers Perrin 27 Silica Diseases Types of Disease Chronic Silicosis  Simple  Complicated (<5%) Accelerated Silicosis Acute Silicosis Lung and Other Cancers Recognized as cause of disease since early 1900s OSHA workplace safety rules implemented in 1970s Reported deaths declining

28. ©Towers Perrin 28 Silica Claim Filings Number of claims has risen dramatically TX: 13,000 MS: 17,000 Plaintiff attorney actions influenced by asbestos Search for additional solvent defendants to pay “mixed dust” claims Beat various tort reforms (e.g., caps on punitive damages) Diversify claim portfolio with pending asbestos reform efforts

29. ©Towers Perrin 29 Silica Claim Filings Target of claims ~160 companies Suppliers of silica sand and products containing silica Manufacturers of sandblasting, grinding, or other equipment Manufacturers of safety equipment Defenses Sophisticated user Appropriate warnings State of art

30. ©Towers Perrin 30 Fraudulent Claims National Tire Workers Litigation Project – 1986 Group 1: 64% positive; Group 2: 95% positive Re-evaluated 439 cases: only 3.6% positive Johns Hopkins Re-evaluated 551 films used as legal basis for claims Originally >90% positive drops to <5% positive 2/16-18/2005 Silica MDL Daubert Hearings – Judge Jack/Corpus Christi, TX >50% of 10K MDL claimants previously filed asbestos claims Doctors testified they weren’t qualified to make diagnoses; didn’t authorize silica diagnoses Defense attorneys have requested $1.1M sanctions against plaintiff attorneys; subject of 3/14/2005 hearing Judge Jack likely to remand cases to state court by end of March

31. ©Towers Perrin 31 Pollution Update

32. ©Towers Perrin 32 Pollution Estimates are Stable Very slow growth in the number of sites on the National Priorities List No dramatic changes in the coverage case precedents, thereby encouraging settlements Ongoing settlement activity has stabilized payment levels Risk based corrective action has resulted in lower clean-up costs than originally expected by the EPA Greater PRP participation in site remediation – incentive to reduce / control costs

33. ©Towers Perrin 33 Pollution: Estimates of the “Universe” Source Tillinghast Net U.S. Ultimate Loss & ALAE $30 – $40 billion Comments Current Estimate Source A.M. Best Net U.S. Ultimate Loss & ALAE $56 billion Comments Unchanged since 1997 A&E Study.

34. ©Towers Perrin 34 Pollution: Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability

35. ©Towers Perrin 35 Jennifer L. Biggs Ms. Biggs is a co-author of Tillinghast’s study regarding the asbestos “universe,” first presented on May 30, 2001 to the RAA Education Conference and the Casualty Actuaries of the Mid-Atlantic Region (CAMAR). She is a consulting actuary with the Tillinghast business of Towers Perrin in its St. Louis office. She is a principal of the firm. Ms. Biggs is a member of Tillinghast’s asbestos and environmental practice area. She coordinates research and development activities relating to asbestos and has quantified reserve needs for asbestos, pollution, and breast implant liabilities for insurance and reinsurance companies. Under her direction as Chairperson, the American Academy of Actuaries Mass Tort Work Group created a Public Policy Monograph: Overview of Asbestos Issues and Trends, which was released in December 2001. Ms. Biggs is a frequent speaker and has testified before the United States Senate Committee on the Judiciary and the National Conference of Insurance Legislators (NCOIL) regarding asbestos issues. Ms. Biggs also has significant experience in the professional liability area. Her work includes analyses of funding requirements, self-insured retention limits, and allocation systems for self- insured trust funds of several hospitals. She also performs reserve evaluations, opining on year- end statutory reserve levels for physician insurers. Additionally, she has assisted insurers by analyzing rate levels and preparing filing materials for entry into new states. Prior to relocating to Tillinghast’s St. Louis office in 1988, Ms. Biggs spent almost four years in Tillinghast’s Bermuda office. There she gained considerable experience in financial reinsurance, performing pricing analyses for loss portfolio transfers. Most other assignments were related to loss reserving for reinsurance and captive insurance companies. Ms. Biggs is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries. Ms. Biggs graduated with college honors from Washington University in St. Louis with a B.A. in mathematics and a business minor. jenni.biggs@towersperrin.com (314) 719-5843