FitchRatings suggests the European insurance industry will be able to withstand the onslaught of asbestos claims, due to peak in another decade or so.

Asbestos is one of those insurance industry issues, which refuses to go away. Like the proverbial bad penny, asbestos-related claims continue to turn up, and still the insurance industry doesn't know the final bill it will face for the exposures.

The US industry has seen recent rounds of reserve strengthening for its asbestos exposures, and European re/insurers have been following suit. A recent report issued by rating agency FitchRatings does, however, raise questions about the reserving levels and future exposures.

Asbestos: academic analysis
In Asbestos: Too Hot to Handle for European Insurers?, the rating agency cites studies undertaken by Professor Julian Peto, head of epidemiology at the Institute of Cancer Research in the UK. In his studies, Professor Peto estimates that mesothelioma deaths will peak between 2015 and 2020 in various European countries, with around 250,000 deaths over the next 35 years. This forecast is very different from that in the US, notes Fitch, where asbestos-related deaths have already peaked and where there is a much lower estimated incidence per head of population. Fitch notes, however, that legal and other factors between Europe and the US may well lead to different experiences for the two insurance communities. These differences include:

  • the less litigious culture in Europe;
  • asbestos trials are mainly tried by professional judges rather than by juries;
  • no contingency fee system in most of Europe;
  • 'loser pays' rules in Europe;
  • lack of forum shopping;
  • claims in Europe tend to be against workers' compensation or employer's liability covers rather than product or public liability covers, as in the US; and
  • government or compulsory social schemes in European countries may pick up some of the economic costs of asbestos-related diseases, meaning that just a proportion of the price will be borne by the insurance industry.
  • European variations
    There are large variations across Europe in the way different countries compensate for asbestos exposures. For example, Germany operates a social security system paid into by employers, which pays out compensation for workers' claims. By contrast, in the UK, compulsory employer's liability coverage has been around since 1972, and these policies, written by the commercial insurance market, typically meet the claims of asbestos-related impairment. "Other countries in Europe fall between these two extremes with varying degrees of coverage by government-sponsored schemes and commercial insurance," according to Fitch. Nevertheless, despite this disparity in the treatment of asbestos-related compensation, Fitch concurs with a total exposure of insurers to European asbestos claims estimated by PricewaterhouseCoopers back in 1999. In that study, drawn on the mortality estimates provided by Prof Peto and his team, PwC calculated total exposures to European risk to fall somewhere between ¤32bn and ¤80bn, the bulk of which will stay in the European market. Add to this the exposure of European reinsurers to US risks through reinsurance programmes, and the re/insurance of asbestos exposures by US subsidiaries of European re/insurers, and the total bill to the European industry could come in anywhere between ¤50bn and ¤120bn.

    This is not, however, fatal in Fitch's eyes. "Given that claims in Europe are expected to be paid considerably later than in the US (due to the later peak of asbestos-related disease), a significantly higher survival ratio is likely to be appropriate for this region," it asserts.

    Fitch feels that, across Europe, asbestos claims will be less of a problem than they have been in the US, but at the same time it does express concerns that European insurers currently may be underreserved. Nevertheless, "reserve additions will be made over a number of years through a combination of a slow bleed into results and through shock losses," it asserts. "This is not to imply that there will be an absence of problems within individual companies and clearly there remains a great deal of uncertainty in this area. Companies are especially at risk where reserve discounting is used, particularly given the inherent uncertainties in the timing as well as the future level of claims payment."

    But in order to get a better handle on the overall asbestos exposures across the continent, Fitch suggests that all European insurers should be required to disclose their asbestos exposures. There is, at present, no such demand, according to Fitch, though some listed insurance companies do disclose some information, "but this varies significantly in methodology, detail and frequency," according to the rating agency. Instead, Fitch calls for minimum disclosure levels, including:

  • separate asbestos and environmental reserving levels;
  • geographical breakdown of asbestos reserves;
  • survival ratios based on a three-year average and reported by geographical region; and
  • the key assumptions made in setting the reserving levels, including the use of discounting.
  • Overall, Fitch concludes, "European groups' asbestos exposures are currently expected to be moderate and manageable for the vast majority of firms. Fitch believes that the hardest hit firms will be specialist liability underwriters without the diversification to absorb asbestos losses. As with the US, the agency expects that asbestos exposures will continue to result in reserve deterioration through both shock losses and a 'slow bleed' into results."