Report Highlights 50% Jump in Asbestos, Environmental Losses

A soon to be issued report from A.M. Best details an increase in U.S. property/casualty insurers’ asbestos and environmental (A&E) incurred losses. The industry faced a 50 percent rise in 2009, after a 47 percent decrease in 2008.

Best’s estimates indicate that it could ultimately pay out a total of around $117 billion on A&E claims.

The following developments affecting A&E claims:

• Aggregate industry funding for A&E liabilities increased by more than $4 billion over the past two years.
• Noteworthy court rulings increased insurance coverage for asbestos claimants.
• Environmental incurred losses have fluctuated, but the industry’s ultimate liability is unlikely to increase in the medium term.
• Paid A&E losses have remained consistently high over the past five years, averaging $2.7 billion a year for asbestos and just exceeding $1 billion a year for environmental.
• More than 75 percent of the industry’s total 2009 A&E incurred losses were concentrated among 10 insurer groups.
• The industry’s accelerated provisions from 2001 through 2005 resulted in sharply improved funding levels; roughly 97 percent of ultimate asbestos loss estimates were funded through year-end 2009, while 83 percent of environmental exposures have been funded.
• The total industry A&E survival ratios were essentially unchanged in 2009 compared with 2008.

Best explained that it had “revised its view of ultimate industry losses downward by $4 billion on Dec. 7, 2009, with asbestos losses now estimated to ultimately cost the industry $75 billion and environmental losses, $42 billion.”

The former estimates were $65 billion for asbestos and $56 billion for environmental. As of year-end 2009, the industry had “funded, through a combination of paid losses and loss reserves, more than $68 billion in asbestos exposures and approximately $35 billion in environmental costs,” Best said.

Several factors are seen as contributing to the estimated rise in losses: the “ongoing elevated level of annual incurred losses, as well as the subtle shift of losses away from products liability claims to non-products claims involving more peripheral defendants for higher settlement values.”

The trend affects general liability policies. Best explained that most such policies “had included sublimits for products liability exposures, this shift in emphasis has resulted in some opening of policy limits. Also, effective tort reform has had mixed results, with some jurisdictions still proving problematic for asbestos defendants.”

Based on Best’s analysis, environmental incurred losses seem to be more manageable. The report notes that while they have “varied significantly, the overall level of such losses remains relatively immaterial, averaging roughly $500 million a year since 1999.

“Only 2004 ($1.4 billion) and 2005 ($1.1 billion) showed materially higher losses. And while paid losses remain at roughly $1 billion a year, and the emphasis on cleaning up sites through the Environmental Protection Agency has increased … the industry’s estimated ultimate liability appears reasonable and is not likely to increase in the medium term.”