1. New Perspectives on Asbestos CLRS – September 23, 2002

2. Bhagavatula

3. Background Miracle mineral Over 3000 applications OSHA guidelines since 1971 Asbestos containing products still legal in the U.S. Diseases marked by long latency period (average 15 to 40 years)

4. Bhagavatula The Specter of Asbestos Increase in claims reported by Manville and other defendants in 2000 and 2001 Majority of the plaintiffs filing claims are not impaired Defendant pool has expanded from 300 in the mid-1980’s to 6,000 today Over fifty asbestos-related bankruptcies to date Twenty asbestos-related bankruptcies since 2000 alone Average settlement demands for individual defendants have increased Legislative attempts have been unsuccessful so far The court system has ceased to be effective in the fair determination of liability The U.S. Supreme court has closed off the avenue for meaningful class action settlements As companies file for bankruptcy, costs are being shifted to solvent parties and new defendants Experts increase asbestos liability projections for defendants and insurance companies

5. Bhagavatula Milliman USA Estimates of Ultimate Loss and Expense Due to U.S. Asbestos Exposure

6. Bhagavatula Agenda Quantification Issues Challenges Recent Developments

7. Bhagavatula Panelists Moderator-Raji Bhagavatula, Milliman USA Panelists-Jason Russ, Milliman USA -Jon Collins, Equitas -Gail Ross, Am-Re Consultants

8. Russ Methods Used to Estimate Reserves Traditional actuarial methods (loss development triangles) do not work

9. Russ Methods Used to Estimate Reserves Instead, use Ground-Up Exposure Models Generally preferred method Needs a lot of data Top Down Methods Simpler, but less reliable Uses aggregate data

10. Russ Top-Down Methods Use Benchmarks Annual Payments (Survival Ratio) Cumulative Paid Cumulative Incurred Case Outstanding Market Share

11. Russ US Insurance Industry Estimates as of 12/31/01 Paid $24B (average $1.5B per year) Reserve $13B ($4B case, $9B IBNR) Case Incurred $28B Total Recognized $37B Ultimate $70B – This is a very uncertain number, but it is used here for illustrative purposes.

12. Russ Survival Ratio = Reserve / Annual Payment Industry survival ratio $13B reserve / $1.5B avg payment = 9 If booked to ultimate, $46B / $1.5B = 31 AM Best using a discounted ratio of 12 Multiply avg payment by ratio to estimate reserve Problems Distorted by unusual payments or changes in settlement activity, highly leveraged, assumes same as industry

13. Russ Cumulative Paid For Industry, reserve need is 2.0 x cumulative paid ($46B / $24B) Multiply cumulative payment by factor to estimate reserve Problems Assumes individual company is at same maturity as industry

14. Russ Cumulative Incurred For Industry, reserve need is 1.7 x cumulative incurred ($46B / $28B) Multiply cumulative incurred (paid + case reserves) by factor to estimate reserve Problems Assumes individual company is at same maturity as industry, assumes case reserve adequacy is similar to industry

15. Russ Case Reserves For Industry, reserve need is 11 x case reserves ($46B / $4B) Multiply case reserves by 11 to estimate reserve Problems Assumes individual company is at same maturity as industry, assumes case reserve adequacy is similar to industry, highly leveraged

16. Russ Market Share Multiply Industry ultimate or reserve by companies share of market based on premium Problems Very little relationship between amount of premium collected and amount of asbestos loss exposure

17. Russ Insurance Co ABC MethodAmountFactor Indicated Reserve Paid2002.0400 Incurred2751.7468 Survival2031620 Case7511825 Mkt Share70,000.7% (-paid)290

18. Russ Ground Up Models Review all open claims Compare loss expectation for each insured to coverage terms Add provision for unreported claims Review existing policies Loading using judgment

19. Russ Model Ultimate for Open DefendantInsurance Co ABC’s share A20 B25............ Total350

20. Russ Model Ultimate Ultimate BI on open claims350 Provision for PD3%10 Provision for DJ2%7 Provision for non-products15%53 Paid on closed claims150 Ultimate for known claims570 IBNR claims Total ultimate 25%143 713 Indicated reserve513

21. Russ Select Reserve MethodIndicated Reserve Paid400 Incurred468 Survival620 Case825 Mkt Share290 Model513 Selected??

22. Russ Considerations Limits vs. Incurred Reinsurance collectibility Insureds Policies without claims Expenses Pools Timing of last review Black Holes Benchmarks may need to be adjusted based on these

23. Russ Limits vs. Incurred Loss Are most policies reserved to full limit? Is a full case reserve put up in consideration of how insured’s loss will develop, or are minimal reserves booked? For reinsurers, RCR vs. ACR

24. Russ Reinsurance Collectibility Disputes between insurers and reinsurers regarding asbestos claims are common How are such issues reflected in the reserves?

25. Russ Insureds What insureds are reporting claims now that were not in the past? How many such insureds have arisen over the past few years? What provision exists for insureds who have not yet reported any claims?

26. Russ Policies Without Claims Are there cases where an insured that has policies for multiple years but has only reported claims for a few of the years? How is this handled? Are reserves put up for all years or just those specified by insured? Are there policy provisions that prevent claims on those other policies?

27. Russ Expenses (ALAE) For some policies, expenses are contained with limits, for others paid in addition to limits Defense costs may be greater than indemnity expense

28. Russ Pools Some reinsurance pools have asbestos exposure How is participant’s reserve established for this? Accept reserve from pool manager? How did pool manager get reserve estimate?

29. Russ Timing When was estimate determined? Industry estimates and estimates of individual defendants have significantly increased Ground-up studies done as recent as 2000 may be outdated

30. Russ Black Holes Policies without aggregates Coverage in dispute Non-products

31. Collins Ground Up Asbestos Modelling Components of a typical company’s overall gross asbestos reserve: Known direct US asbestos assureds Unknown direct US asbestos assureds Other direct US asbestos liabilities (DJs, PD etc) Inwards reinsurance / retrocession liabilities for US asbestos Non-US asbestos liabilities

32. Collins Ground Up Asbestos Modelling Known Assureds Reserving for known US asbestos direct assured: Step 1: Value Open Claims (to assured) Step 2: Project future (IBNR) claims Step 3: Apply to insurance coverage

33. Collins Ground Up Asbestos Modelling Known Assureds Step 1 - Value Open Claims (to assured): Assured Level Data required (ideal): Historical settlement experience split by disease (split by indemnity and expense) Breakdown of open inventory by disease Often get only: Aggregate settlement experience across all diseases (split indemnity and expense) No of open claims/closed

34. Collins Ground Up Asbestos Modelling Known Assureds Step 1 - Example Mesothelioma Settlement Experience 1996 1997 1998 1999 2000 2001 250 800 300 300 500 200 8,000 2,500 15,000 6,000 11,000 9,000 No SettledAverage Cost ($) Selection for 200210,000

35. Collins Ground Up Asbestos Modelling Known Assureds Step 1 - Example Meso Cancer Non-Malignant 250 500 10,000 10,500 3,000 750 No of Open Cases Average Cost* $ 2.625 1.500 7.500 11.625 Total Cost $m * With allowance for claims inflation Disease

36. Collins Ground Up Asbestos Modelling Known Assureds Step 2 - Value Future (IBNR) Claims (to assured): Assured Level Data required (ideal): Historical settlement experience split by disease (split by indemnity and expense) Historical claims filing experience by disease Often get only: Aggregate settlement experience across all diseases (split indemnity and expense) Aggregate filing experience across all diseases

37. Collins Ground Up Asbestos Modelling Known Assureds Step 2 - Value Future (IBNR) Claims (to assured): Generic information and assumptions required: Epidemiological projections of rates of future disease incidence (to generate expected future filings) Future claims inflation assumptions by disease

38. Collins Ground Up Asbestos Modelling Known Assureds Step 2 - Example Mesothelioma Filings Experience

39. Collins Ground Up Asbestos Modelling Known Assureds Step 2 - Example Mesothelioma Filings Projection* * Using Stallard and Manton (1994) projection

40. Collins Ground Up Asbestos Modelling Known Assureds Step 2 - Example Meso 2,057 15,000 30.855 Cancer 5,0004,50022.500 Non-Malignant 50,000 1,000 50.000 Total 103.355 No of Projected Future Claims Average Cost* $ Total Cost $m * With allowance for claims inflation (you would actually do this on a year by year basis, but we have simplified things here) Disease

41. Collins Ground Up Asbestos Modelling Known Assureds Step 3 - Apply to insurance coverage: Assured level data required (ideal): Full insurance coverage information across all years impacted by asbestos claims (not just your policies)

42. Collins Ground Up Asbestos Modelling Known Assureds Step 3 - Example Total Assured Liability $m Outstanding Claims 11.625 Future Claims 103.355 114.980 Apply Insurance Coverage Self Insured 54.980 Other Insurers 40.000 Insurance Co. ABC 20.000 114.980

43. Collins Ground Up Asbestos Modelling Unknown Assureds, DJs Etc Unknown assureds: Allowance will depend upon type of coverage sold Highly judgmental DJs: Normally a percentage load based upon past experience

44. Collins Ground Up Asbestos Modelling Inwards Reinsurance/Retro Liabilities Principles as for direct assureds - model underlying direct exposure to cedant and then overlay reinsurance treaties In practice limiting factors include: Lack of information on underlying coverage Lack of information on inuring reinsurance protections (eg Fac.)

45. Collins Ground Up Asbestos Modelling A selection of issues that have to be addressed: Non-products claims Insurance coverage interpretation and disputes Interpreting erratic historical settlement experience Interpreting erratic historical filing experience Impact of accelerated filings Impact of bankruptcies (direct and indirect) Selecting epidemiological projections Impact of multiple defendants Understanding underlying disease trends Factors influencing future claims inflation Quality of existing inventory and current filings Unimpaired claimants

46. Collins Ground Up Asbestos Modelling Non-US Asbestos Liabilities Number of people exposed very large Peak of exposure in Europe is much later than for the US Size of claims is much smaller Unimpaired claims are not (currently) an issue For UK claims fall under Employer’s Liability insurance, which operates on a per claim basis with no aggregate limit

47. Ross Black Holes “Long-Running Asbestos Claims Show No Sign of Coming to an End (Insurance Day, August 2002) “Bankruptcies Force Asbestos Litigants to Seek Compensation from New Defendants” (Insurance Day, Jan.2002) “Reinsurers Have Hands Full with Asbestos Claims Disputes” (National Underwriter, July 2001) “Asbestos Funding Uncertain” (Business Insurance, June 2002) “Insurers Could See Payout Timeline for Asbestos-Related Claims Shrink” (Wall Street Journal, April 2002)

48. Ross What’s Causing the Black Hole? New Wave of Claimants Expanded List of Targeted Defendants Joint and Several Liability Non-Products Coverage Pursuits Direct Liability Forum Shopping Increased Loss & LAE Severity “Pay Now” Judgments

49. Ross New Wave of Claimants Estimate of total asbestos related personal injury suits: Mid-1990s: 0.6 million Current: 1.2 to 2.4 million Unimpaired Claimants 1982: 4% of Claimants 1993: 50% 2000: > 66% Source: Rand Corporation Institute for Civil Justice

50. Ross Unimpaired Claimant Game Plaintiffs attorneys file claims on behalf of non- sick claimants on the premise that they might become sick in the future from asbestos exposure File “inventory claims” consisting of a handful of sick claimants with hundreds/thousands of non- sick claimants Limited number of courts are swamped with huge number of claims

51. Ross Unimpaired Claimant Game - Result Forces defendants to pay settlements on the unimpaired claims to avoid going to trial on impaired claims Genuinely sick and dying are often deprived of adequate compensation Flood of claims has driven 19 asbestos defendant companies into bankruptcy since January 2000 (over 50 to-date)

52. Ross Other Reasons for Increased # Claims Once a bankruptcy occurs, surge of claims to beat bar date set by court Attorney advertisements – more informed public Concern that reform legislation may be imminent

53. Ross New Defendants The universe of potential defendants is expanding due to the bankruptcies of earlier (“traditional”) defendants Claimants are suing any (“non-traditional”) defendant who may have been responsible for exposing them Rand estimates that companies in more than half of all U.S. industries have been sued over asbestos-related claims

54. Ross “Traditional” Industries“Non-Traditional” Industries Increase in Number of Asbestos Claims: 2001 vs. 1999 Source: Claims Resolution Management Corporation, III

55. Ross Joint & Several Liability Plaintiffs attorneys file claims against several dozen defendants Under joint & several liability plaintiff may recover the full amount of the award from any of the defendants

56. Ross Non-Product Coverage Pursuits Product/Completed Operations liability coverage is generally written with an aggregate limit As Products/Completed Operations liability limits have been exhausted, there’s been a trend towards filing new claims under Premises/Operations coverage which generally don’t carry aggregates

57. Ross Direct Liability Claimants are seeking to impose direct liability on insurers claiming they knew, or should have known about the presence of asbestos in insured’s location Wise vs. Travelers (W. VA) – plaintiff alleges Travelers violated W. VA Unfair Trade Practice Act

58. Ross Forum Shopping Strategy used by plaintiff attorneys to have cases heard in states where juries have proven to be sympathetic and award large amounts AL, MS, TX

59. Ross Increased Loss & LAE Severity Ripple effect of huge judgments Western MacArthur vs. St. Paul Insurers/reinsurers spending more on legal expenses for DJs, damages lawyers and merits counsel New drugs help those suffering from asbestos-related lung cancer live longer Could increase the damages award

60. Ross “Pay Now” Judgments Fuller-Austin vs Fireman’s Fund Policyholder’s bankruptcy plan required immediate funding of future asbestos- related claims by insurer If upheld, significant risk to insurers due to less time value of money on reserves

61. Ross Bottom Line Still lots of uncertainty on the ultimate size of the Black Hole Agreement that there needs to be change and it’s happening London documentation

62. Collins London Asbestos Developments Documentation Requirements Bankruptcies Claim Valuation

63. Collins London Asbestos Developments: Documentation Requirements London Market insurers have issued “Documentation Requirements” (DR’s) designed to reimburse only claims supported by: Adequate medical evidence of a claimant’s impairment Appropriate identification of the product responsible for that impairment

64. Collins London Asbestos Developments: Documentation Requirements General Documentation Claimant’s name and social security number Copy of complaint (or other writing making claim) Amounts received from other parties (if discoverable) Medical Documentation Different documentation for each disease type In all cases, a specific diagnosis that claimant’s condition was caused “in substantial part” by asbestos Pleural plaques only reimbursed if governing law allows recovery

65. Collins London Asbestos Developments: Documentation Requirements Product Identification and Exposure Documentation Separate product identification requirements for products and premises/operations claims A sworn statement that describes specific circumstances of exposure (unless claimant employed in one of designated occupations) A comprehensive work history

66. Collins London Asbestos Developments: Documentation Requirements Other Provisions Assured may request an opportunity to demonstrate sufficient evidence of injury and causation despite non-compliance with Documentation Requirements Documentation Requirements may be modified if a different standard of proof applies in any particular jurisdiction

67. Collins London Asbestos Developments: Documentation Requirements FAQs 1. Do the DR’s change the terms of policies or coverage-in-place agreements? 2. Are the DR’s consistent with governing law? 3. Do the DR’s change past practice? 4. Were policyholders involved in the issuance of the DR’s? 5. How can the DR’s benefit asbestos claimants?

68. Collins London Asbestos Developments: Bankruptcies Look for: Active involvement by insurers to ensure sound trust procedures Adoption of Documentation Requirements by bankruptcy trusts Vigorous fights against application of UNR Efforts to negotiate final deals: Bankruptcy Code raises this possibility Possible legislative action (?)

69. Collins London Asbestos Developments: Claim Valuation More rigour is needed in the analysis of claims values by insurers This helps assureds to more effectively negotiate underlying claims Trial outcomes are frequently positive