Skeletons in the Cupboard -Latent claim developments in General Insurance,Why they have happened and Possible inferences for healthcare

Camilla Bennett and Kenneth McGaughey, PricewaterhouseCoopers LLP27 April 2004, 2004 Healthcare Conference, Scarman House, University of Warwick

Contents

Background to known latent claims within General InsuranceAn example of techniques used in General Insurance to reserve for known latent claimsCan insurers price for currently unknown latent claims?Opportunities to debate how this applies to healthcare

1. Background to known latent claims within General Insurance

Estimated ultimate claims c

ost could be over $250bn

Asbestos

What is asbestos?Why is asbestos a problem?

Not easy to detect and diagnose –except by chest X-rays

Scaring or thickening of the pleura – Not generally disabling

Pleural Plaques

10-20 yearsThickening or hardening of the pleura –Can be disabling

Pleural-thickening

15-30 yearsPneumoconiosis, non-cancerous scarring of lung tissue – Can be disabling

Asbestosis

20-30 yearsCancer of the bronchial – Often fatalLung Cancer

30-40 years can be as long as 50 yearsCancer of membranes that cover the lungs – Fatal within 2 years of diagnosis

Mesothelioma

Latency PeriodDescriptionDisease

US Asbestos

1982 2002Number of Claims 21,000 600,000Number of Defendants 300 8,400Total Costs to Date $1bn $54bnBankruptcies 3 64Estimated future costs $38bn $200bnSource: Standard & Poors

US Asbestos

Legal history

Borel v Fibreboard, 1973 - policies affectedExclusions – Asbestosis (late 1970s / early 1980s) - Absolute asbestos clause (mid-1980s)Wellington agreement, 1985 – “injury in fact” exposure allocationAsbestos Claims Facility (1985-88) and Centre for Claims Resolution (1988-2001) – producers & insurers work togetherGeorgine settlement (early 1990s) – signs of an asbestos related disease needed – Supreme court overturned (1997)Fibreboard (1993) – global settlement – Supreme Court rejected (1999)Fuller-Austin judgement (2002) – all pending & future coverage to be paid to trust immediately – still subject to appeal

US Asbestos

Other issues

Level of medical evidence requiredVenue shoppingBundlingStressKnowledgeAggregations

UK AsbestosWhy is asbestos an issue in the UK?How does this affect insurers?

Ultimate market loss estimate £7-25bn (HSE)Claims on Employers Liability policies Exposures from 1940–90 with peak around late 1960s–70sEstimated years of peak claims 2000-20

Legal issues to dateFairchild rulingABI protocolCape rulingGeologistics vs FSCS

Other issuesSolicitors use “scan vans”Bad press / reputationState support

US Pollution

BackgroundSuperfund or CERCLA, 1980Retroactive, strict, joint & severely liableNPL sites; other sites 10s of 1000s

Issues impacting insurersGL policiesExclusion clausesTriggerAllocationAggregationsExpensesVenue shopping

Other latent claims

Current known:Vibration White Finger (“VWF”)Noise Induced Hearing Loss (“NIHL”)Toxic MouldSilicaStress

Possible future:Tobacco – passive smokingMobile phonesClean rooms

Impact of legal precedent on bodily injury reserve estimates

OgdenNon-pecuniary loss awardsNHS ChargesCFAsWoolfPeriodic payments

2. An example of techniques used in General Insurance to reserve forknown latent claims

Number of Mesothelioma deaths in the UK

-

200400

600800

1,000

1,2001,400

1,6001,800

2,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Report year

Num

ber

of m

eso

clai

ms

HSE

2. An example of techniques used in General Insurance to reserve forknown latent claims

The number of Mesothelioma deaths and the HSE's predicted Mesothelioma deaths in the UK

0

500

1,000

1,500

2,000

2,50019

68

1973

1978

1983

1988

1993

1998

2003

2008

2013

2018

2023

2028

2033

2038

2043

2048

2053

2058

2063

2068

Year

Num

ber

of M

esot

helio

ma

deat

hs

Mesothelioma deaths reported HSE predicted Mesothelioma deaths

Source – Mesothelioma mortality in Great Britain : Estimating the future burden

UK asbestos modelling (1)Assess exposures

Estimate ultimate number of claims

Disease incidence rates & mortality tablesNumber of claims reportedMarket versus Company specific information

UK as be s tos imports and as s ume d e xpos ure le ve ls

0

50

100

150

200

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Ye ar

Ann

ual U

K a

sbes

tos i

mpo

rts

(tho

usan

ds o

f ton

nes)

Im port s

Number of Mesothelioma deaths in the UK

-

200400

600800

1,000

1,2001,400

1,6001,800

2,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Report year

Num

ber

of m

eso

clai

ms

HSE

UK asbestos modelling (2)

Estimate ultimate ACPCCourt awardsInsurer’s settled and outstanding ACPC

BenchmarksSurvival ratiosIBNR:OS

Data issuesInsolvenciesPaper recordsClaims capture

Number of Mesothelioma deaths in the UK

-

200400

600800

1,000

1,2001,400

1,6001,800

2,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Report year

Num

ber

of m

eso

clai

ms

HSE

Other modelling approaches

Direct insurersGround up loss by assuredApply to insurance

ReinsurersGround up lossBenchmarking

Data issues

Number of Mesothelioma deaths in the UK

-

200400

600800

1,000

1,2001,400

1,600

1,800

2,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Report year

Num

ber

of m

eso

clai

ms

HSE

3. Can insurers price for currently unknown latent claims?

EL – pricing for disease claims

Historic pricingHigh uncertaintyLack of dataCompetitionPolicies not claims made

Split disease and non-disease componentsDefinition of long tail diseaseEffective dateFundingPotential cost savings and research benefits

EL – capital for disease claims

Capital implicationsCapital allocation – pricing & performance measurementDisease claims – high insurance riskEL capital intensiveCP190 - ICAs

4. Opportunities to debate how thisapplies to healthcare

Critical Illness

Disease coverage / exclusionsClaims on existing policies – creeping definitionsDifficulty of pricing / reserving models

Data sources already poorNew diseases/conditions – excluded from experienceMaybe unexpectedly covered under PTD

Claim date definition

Over to you …

Final message – Always be paranoid

Tight wordings – direct and reinsuranceFuture legal environmentCompensation cultureReputationDataUncertainty

Skeletons in the Cupboard -Latent claim developments in General Insurance, Why they have happened and Possible inferences for healthcare

camilla.b.bennett@uk.pwc.com, +44 20 7212 3474 kenneth.w.mcgaughey@uk.pwc.com, +44 20 7212 6490