1. Asbestos Reserving Issues and Trends Kevin Madigan, MHL/Paratus September 23, 2002

2. The 5 Stages of Loss

3. Denial Anger Bargaining Depression Acceptance

4. The 5 Stages of Loss Denial Anger Bargaining Depression Acceptance At which stage is the insurance industry?

5. Easy to focus on the insane aspects of the litigation and to lose sight of painful facts. Plaintiffs bar loves these cases because they are easy.

6. EDITORIAL COMMENTS Underwriting catastrophe

7. EDITORIAL COMMENTS Underwriting catastrophe “Asbestos has caused more cancer in the workplace than all other substances combined”

8. EDITORIAL COMMENTS Underwriting catastrophe “Asbestos has caused more cancer in the workplace than all other substances combined” Smoking Gun Documents Expected and Intended?

9. EDITORIAL COMMENTS Underwriting catastrophe “Asbestos has caused more cancer in the workplace than all other substances combined” Smoking Gun Documents Expected and Intended? Kelly-Moore sues Dow and Union Carbide Subrogation?

10. More Comments Peripheral Defendants “We were lazy”

11. More Comments Peripheral Defendants “We were lazy” Brake linings can be up to 50% asbestos by composition

12. More Comments Peripheral Defendants “We were lazy” Brake linings can be up to 50% asbestos by composition Plaintiffs getting less money even though solvent defendants paying more

13. More Comments Peripheral Defendants “We were lazy” Brake linings can be up to 50% asbestos by composition Plaintiffs getting less money even though solvent defendants paying more Senate hearings; Cheney & Halliburton

14. Lawyers oPlaintiffs oDefendants oPolicyholders’ Coverage Counsel oBankruptcy Experts oPrimary vs. Excess Carriers’ Coverage Counsel oReinsurance Disputes

15. Evaluating Liabilities Benchmarks – what to do “in a pinch”

16. Evaluating Liabilities Benchmarks – what to do “in a pinch” Survival Ratios (Ratio of reserves to average annual paid losses)

17. Evaluating Liabilities Benchmarks – what to do “in a pinch” Survival Ratios (Ratio of reserves to average annual paid losses) IBNR to Case Ratios

18. Evaluating Liabilities Benchmarks – what to do “in a pinch” Survival Ratios (Ratio of reserves to average annual paid losses) IBNR to Case Ratios Implied LDFs

19. Evaluating Liabilities Benchmarks – what to do “in a pinch” Survival Ratios (Ratio of reserves to average annual paid losses) IBNR to Case Ratios Implied LDFs Market Share Methods

20. Evaluating Liabilities Benchmarks – what to do “in a pinch” Survival Ratios (Ratio of reserves to average annual paid losses) IBNR to Case Ratios Implied LDFs Market Share Methods None of these really do the trick

21. Evaluating Liabilities More appropriate method(s) Understand the legal environment and the way all of the pieces fit together. The actuary has to synthesize a large volume of qualitative and quantitative data.

22. Evaluating Liabilities More appropriate method(s) 1.DETAILS 2.DETAILS 3.DETAILS

23. Evaluating Liabilities More appropriate method(s) Talk and LISTEN, LISTEN, LISTEN to Claims professionals They know more about this than most of us ever will

24. Evaluating Liabilities More appropriate method(s) Talk and LISTEN, LISTEN, LISTEN to Claims professionals Gather information Nature of exposure and available insurance

25. Evaluating Liabilities More appropriate method(s) Talk and LISTEN, LISTEN, LISTEN to Claims professionals Gather information Use modeling skills to analyze the source of the exposure

26. Evaluating Liabilities More appropriate method(s) Talk and LISTEN, LISTEN, LISTEN to Claims professionals Gather information Use modeling skills to analyze the source of the exposure Produce distributions of IBNR

27. Evaluating Liabilities More appropriate method(s) Exposure Analysis – GROSS basis Direct Assumed (traditional) reinsurance Retrocessional Cover Analyze Ceded Losses Separately Collectibility Issues Commutations

28. Evaluating Liabilities Direct Insurance oGround-Up analysis of insured’s liabilities ostochastic if possible oFuture Frequency and Severity oHow Many More Years? oAllocation to past Policy Years oKnowledge of performing coverages oPrimary vs. Excess oNumber of Occurrences oPush through insurance program to calculate GROSS liabilities oInsolvents, SIRs, “bare years” oProducts vs. Non Products (Limits!) oPure IBNR oLots of judgment

29. Evaluating Liabilities Assumed Reinsurance oGround-Up is harder to pull off due to data issues (e.g. coverage) oTop-down analysis of Gross liabilities oCedant reserving and reporting patterns oSource of loss to cedant (original insureds) oRecent Annual Average “billings” – paid and case oPrior consumption of coverage oKnown, but unreported, potential risks oLots of judgment

30. Evaluating Liabilities Retrocessional Cover oTwo options oExhaustive and expensive study oUnderstand the mechanics and participants and do a bulk study oLots of judgment

31. Evaluating Liabilities Talk and LISTEN to Claims professionals, then apply modeling skills to produce distributions of IBNR.

32. Evaluating Liabilities Talk and LISTEN to Claims professionals, then apply modeling skills to produce distributions of IBNR. Thin data & lots of uncertainty.

33. Evaluating Liabilities Talk and LISTEN to Claims professionals, then apply modeling skills to produce distributions of IBNR. Thin data & lots of uncertainty. Get fact AND opinion from knowledgeable people, and use it to model the situation