As Equitas' results for the year ending 31 March 2001 were issued, newspaper headlines focused on the announcement that the reinsurer of Lloyd's pre-1993 liabilities had added more than £1bn to reserves. More specifically, it strengthened its provisions for asbestos-related exposures by £1.7bn on a gross undiscounted basis. The ‘shock horror' aspect of the strengthening does, however, mask the substantial progress Equitas has made in recent years, and, in fact, appears to point more to realistic management than the scaremongering tactics that have been hinted at by commentators.

Whether in the past Equitas dwelt on its ‘uncertain position' to encourage accelerated claims payments and commutations is open to debate. However, with other re/insurers now identifying large holes in their reserves for asbestos-related claims, it would appear that Equitas is in the vanguard of organisations squaring up to the problem. In its most recent accounts, issued in July, Equitas explained at length the background against which it has made this decision.

In his review, Chief Executive Michael Crall commented, “The number of asbestos bodily injury claims filed in the United States in the past year has increased substantially, exceeding previous actuarial estimates.” Although claimants are filing against more defendants, Mr Crall refuted the conclusion that this will lead to an increased level of payouts. “This should not mean that the claimants will recover more than the value of their claims,” he stated, “it simply means that claimants have more defendants from which to procure this value.”

Nevertheless, he noted that in recent months, eight US companies, including WR Grace, Owens Corning and US Gypsum, filed for bankruptcy protection because of their asbestos-related exposures, and he foresaw another tranche going down the same route over the next few months. “In addition,” he said, “other insurers have substantially strengthened their reserves for asbestos-related claims, while various actuarial and investment advisory firms have significantly increased their estimates of ultimate asbestos claims costs.”

Equitas' £1.7bn gross undiscounted provision is not massively higher than last year's £1.5bn, and brings the total undiscounted gross provision for asbestos-related claims to £8bn. The organisation does, however, benefit from fairly substantial counterbalances; Equitas' £11.5bn provision for total outstanding claims for the year is, in real terms, reduced to £7.4bn taking discounting and reinsurance into account. And this is after the discount rate was lowered from 5.75% for the previous year to 5% for the reported year, because of lower market yields on its investment portfolio. Gross discounted asbestos reserves now amount to £4.6bn, compared to £3.6bn the previous year.

In its annual report, Equitas provided a meaty explanation of the background to asbestos-related liabilities. In the special section, Equitas pointed out that it has already implemented new strategies for managing asbestos-related claims, following a review it undertook with London market insurance companies. Asbestos reserves account for more than half Equitas' outstanding gross undiscounted claims, up from 46% the previous year to 57% for the year ended 31 March 2001. In addition, more than 95% of Equitas' asbestos-related reserves are related to US claims.

The special report noted that the widespread use of asbestos led to millions of US workers being exposed to the mineral, though exposure levels dropped in the 1970s as the US government banned its wide-scale use following public concern about the potential health risks. “About 500,000 of those workers so far have filed asbestos-related bodily injury claims against one or more defendants,” it commented. Asbestos-related diseases can take up to 40 years to manifest themselves, but “the current flood of asbestos claims, more than 25 years after most uses of asbestos in the US were rigidly controlled, was not anticipated and consists in large part of claims filed on behalf of people not actually harmed by exposure to asbestos.”

It is this facet of the asbestos-related claims culture to which Equitas is now squaring up. Following the review conducted with members of the London company market – a review Equitas said will be on-going – the organisation brought in several measures to reduce its asbestos-related liabilities. These are:

  • requiring policyholders to provide adequate medical evidence of asbestos-related disease and adequate identification of the product which caused the disease. “We believe that policyholders are settling significant numbers of claims that do not meet even these standards,” commented the report;
  • rigorous reviews of proposed inventory settlement agreements. “We believe that many such settlements are unreasonable for a variety of reasons, including the substantial amounts often paid to unimpaired claimants under such settlements,” it stated. “Where appropriate, we will refuse to consent to inventory settlements that we conclude are unreasonable”;
  • contesting certain coverage in place agreements. “We have terminated one ‘coverage in place' agreement and filed a declaratory judgment action in which we asked the court to impose new, more favourable rules for allocating claims among policies and between insurers and the policyholder,” according to the report. “We have recently filed another declaratory judgment action because we believe that a ‘coverage in place' agreement is no longer enforceable because of the policyholder's bankruptcy and its breaches of the agreement”;
  • participating in defendants' bankruptcy proceedings, “in an effort to achieve fair and equitable results that do not impose unwarranted liabilities on insurers,” stated the report. “Where possible, we are seeking to negotiate final buyouts of policies of bankrupt asbestos defendants. The finality regarding asbestos claims that is available for both policyholders and insurers in the bankruptcy process may make such agreements – which have proven very difficult to obtain outside bankruptcy – more feasible”; and
  • negotiating policy buyout. “Policyholders are typically reluctant to enter into such buyouts pertaining to asbestos claims because of the great uncertainties regarding the size of the ultimate liabilities. Where appropriate, we are attempting to overcome this reluctance by exploiting the use of innovative financial tools when structuring the buyouts so that they are attractive to policyholders.”

    At the time the new documentation requirements were announced, in May, Glenn Brace, head of asbestos, pollution and health hazard claims for Equitas, commented, “This is one step to limit abuses in what has become an asbestos litigation industry. We hope other insurers and defendant companies will take similar steps. We support a system in which injured people receive fair compensation from companies responsible for their injuries, and we support reimbursement of such payments by insurers. However, payments to people who are not harmed, or by companies which did no harm, are not justified.”

    Equitas estimated its three-year asbestos ‘survival ratio', gross of reinsurance recoveries and excluding commutation payments at 26.5. “By comparison, we estimated that the average three-year gross survival ratio for a representative sample of US insurers was 6.8 as at 31 December 2000,” it stated in the report. Equitas also noted that its payments out for asbestos-related claims has fallen short of its projections when it was first set up, though this is related to the length of time it takes to settle these types of claims.

    There can be no doubt that the whole issue of calculating the overall industry exposure to asbestos-related liabilities is a minefield. Estimates issued by US rating agency AM Best increased by more than 60% between 1997 and 2001, to $65bn, though some suggest that even that sum is modest. Equitas' own response has been to develop a detailed actuarial model, though it concedes, “estimates of both the number of future claims filings and the size of future claims payments include a large degree of judgment since the number of claims filed in the future may be significantly affected by actions taken by individual claimants, their attorneys, asbestos defendants, US court and the US Congress, among others.” And this leads to Equitas' caveat on its results: “We are optimistic that the actions we are taking will limit the threat which asbestos claims pose to Equitas' financial stability, but we cannot yet be certain that these actions will be successful.” Other re/insurers should take note.

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