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Asbestos losses likely to continue to 'bleed through' insurers' earnings, report says

By John O'Brien | Apr 18, 2014

NEW YORK (Legal Newsline) - A recent report detailing the impact of asbestos liability on insurance companies shows a steady loss of $2 billion annually that doesn't appear to be slowing down.

Released on March 21, the Fitch Ratings' report "2014 U.S. Asbestos Liability Dashboard" looks at the impact of asbestos litigation on insurance companies.

James B. Auden, a chartered financial analyst with Fitch Ratings, said that while losses due to asbestos are persistent, they are not a death blow to insurance companies.

"From our perspective looking at insurance companies, asbestos has been a source of significant losses for a number of companies over the long term," he said. "But in recent years, they've gotten a better handle on their losses."

According to the report, by the end of 2013, U.S. property/casualty industry's statutory asbestos reserves had a deficiency between $2 billion and $9 billion.

"These asbestos lawsuits have been a consistent drag on earnings over the years," said Dafina M. Dunmore, a chartered financial analyst with Fitch Ratings.

In fact, U.S. property/casualty insurers' liable for insuring asbestos-exposure claims incurred losses averaging approximately $2 billion per year for the last five years, Auden said.

That deficiency range was based on estimated insured losses of $85 billion, which can be narrowed down to total paid losses of $53 billion and current reserves totaling $23 billion, according to the report.

"That's by far the biggest mass tort claim that the insurance market has faced over exposure," Auden said.

In an effort to prepare for high numbers of claims, Auden added that insurance companies have set up reserves anticipating a lot of losses.

What makes these losses unique, though, is that they arise from business the insurance companies wrote more than 40 years ago.

"Things that were written in the 1970s," Auden explained, "they are still facing losses from those."

He added that it's unusual in the insurance industry for companies to continue generating losses after so many years.

Despite the hit asbestos insurers are taking from rising asbestos claims, they account for roughly four percent of the total insurance industry, the report states, which means that while the asbestos industry is causing losses, other industries are reporting gains.

In other words, while the likelihood of asbestos cases continuing to cost insurers money is high, the industry will not go under because of it.

"Asbestos-related losses are likely to continue to bleed through insurers' earnings, but will not likely generate severe capital shocks that provoke negative rating actions," the report states.

In an effort to remain ahead of these losses, the asbestos insurance industry approach has been to strengthen reserves as claims are paid, which results in keeping reserves relatively flat, the report states.

"The earnings drag from asbestos losses for the most exposed insurers averaged almost one percentage point on the combined ratio for the past five years," it stated.

According to the report, the number of claims filed has declined recently, but the payments per claim are increasing, which it attributes to the higher number of mesothelioma cases versus lung cancer cases. Mesothelioma cases typically garner larger awards than lung cancer cases, thus costing insurance companies more.

However, when looking at asbestos litigation in the courtrooms, numbers show that asbestos case filings in hot spot jurisdictions are actually on the rise with an increasing focus on lung cancer cases.

In fact, Madison County asbestos case filings jumped to 1,678 in 2013, which is roughly 100 cases more than 2012's case filings.

Of those cases, at least 735 of them were lung cancer cases.

The rise in lung cancer claims could be attributed to what the report considers a possible new wave of asbestos claims.

If a rise in claims were to incur, Dunmore said the industry would be able to withstand the influx.

She said she would expect that such increases would not come all at once, but rather spread out over several years, as what has happened in past decades. And when they do come, she said insurance companies will continue to pay claims as they are filed.

"We don't think there will be a huge big capital shock that will take the industry under," Dunmore said.

The report explains that although the widespread usage of asbestos in products has been curtailed since the 1970s, that does not mean risk of claims arising from new sources and litigation has disappeared.

Looking forward to what insurance companies can expect in the future is somewhat difficult, Auden and Dunmore explained, because asbestos claims from "international developments" and third-party exposures, or bystander exposures, are hard to predict, meaning they are in the dark when trying to calculate the impact. In fact, current methods for estimating asbestos losses do not sufficiently consider those specific cases.

International developments were described as cases in countries like Europe and Australia which are just now seeing their spike in asbestos cases and have not quite reached their peak of case filings. Those developments can also be attributed to cases in countries that have not yet eliminated the wide use of asbestos in product manufacturing.

As for third-party exposure, Dunmore explained that it relates to those who allege asbestos exposure through such activities as laundering a family member's clothing after working around and with asbestos all day. Those exposures are harder to prepare for because they are inconsistent and unpredictable.

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