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A.M. Best: Insurers May Face $11 Billion More in Asbestos Claims

Source: Dow Jones

Posted on 18 Dec 2012 by Neilson

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Asbestos claims U.S. insurers may face $11 billion more in asbestos-related costs than they were anticipating, according to a new study that warns claims on decades-old insurance policies show no signs of abating.

The insurance industry has already paid out about $51 billion in claims tied to asbestos over the past quarter century, and has $23 billion set aside for future expenses. But the report from ratings firm A.M. Best concludes the ultimate cost of such claims will eventually hit an estimated $85 billion. That's up from $75 billion in its previous estimate, published last year.

The increasing cost of each claim, the recent successes of plaintiffs' attorneys, and the long latency periods for some of the more serious illnesses caused by the once widely used mineral mean "sizable losses are likely to continue for years," A.M. Best said in the report, due to be released this week.

Insurers with significant exposure to asbestos claims include Hartford Financial Services Group Inc., Travelers Cos. and Warren Buffett's Berkshire Hathaway Inc., which has taken on billions in asbestos liabilities in recent years through reinsurance deals with American International Group Inc., CNA Financial Corp. and Lloyd's of London.

While it hasn't been widely used since the late 1970s, asbestos was once common in a variety of building materials and other products, and valued as a fireproofing and insulation material until it became clear that it presented a significant health hazard.

The diseases it can cause--asbestosis, mesothelioma and others--can take decades to present themselves, so new cases continue to emerge many years after people were exposed. Therefore, insurers are still paying out on the coverage they sold in the decades when asbestos was in wide use.

An extra $11 billion in unexpected costs over the course of several years wouldn't be enough to cripple the insurance industry, but investors have reacted poorly in the past when companies have announced major additions to reserves on longstanding liabilities like asbestos.

At $11 billion, the asbestos shortfall would equal about half the estimated cost of Sandy, the massive storm that struck the Northeast in late October.

Insurers are posting nearly $2 billion in losses each year and the "loss trend remains worrisome," according to an advance copy of the report.

"The plaintiff's bar has experienced success in eroding some reforms, as well as focusing on obtaining higher judgments for the more serious cases involving mesothelioma," wrote A.M. Best analyst Gerard Altonji. "Given the long latency period between exposure to asbestos and the manifestation of mesothelioma, as well as the very large number of people exposed over a great many is likely that asbestos losses will continue to develop for many years to come."