Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
Property and casualty (P&C) insurance headlines these days are generally focused on issues relevant to current policies. Topics often covered range from the causes and impact of social inflation and the hardening of the insurance market to the costs associated with COVID-19 claims for various lines of business and the potential impact of COVID-19 on insurance industry claim settlements, exposures, and premium volume. Although not receiving as much attention, historical accident years have also been experiencing deteriorating trends, both for mature exposures such as asbestos, environmental pollution, and construction defect claims as well as for emerging exposures related to talc, sexual abuse, and opioid litigation.
Understanding and coming to terms with the impact of these potential legacy losses is important, not only in the context of establishing an appropriate reserve, but also to form a view of the load for mass torts needed for pricing current policy years. Very often insurance companies segregate these mass tort claims, housing them in discontinued operations, ceding such exposures as part of adverse development covers or simply removing them from actuarial analyses to prevent them from “distorting” the analyses of the “normal” claims. Our experience suggests that for commercial general liability books of business, these legacy exposures contribute on average an additional three to ten loss ratio points per year. Therefore, if such losses are stripped from the historical data for pricing or reserve analyses, a similar load might be appropriate for the recent and future accident years, to cover mass torts not known now but which could emerge in the future.
We briefly discuss a number of these “legacy” topics that impact the general liability books of commercial insurance companies. From a loss reserving perspective, some of these issues are more relevant to policies written in the 1980s and prior (such as asbestos and pollution), while others are focused on policies written since 2000 (such as construction defects and opioids). Each of these topics could easily be the subject of its own article, as the issues surrounding each are numerous and complex.
As of year-end 2019, the U.S. insurance industry has recognized approximately $92 billion in losses from asbestos liabilities (including $74 billion in payments, $7 billion in case reserves, and $11 billion in incurred but not reported (IBNR) reserves). In 2016, AM Best estimated ultimate losses for the industry of $100 billion, which would imply the total reserves currently booked of $18 billion would need to be increased 44%. Based on our work evaluating such liabilities for a number of insurers, reinsurers, and corporate defendants, we estimate the ultimate loss to be in the range of $100 billion to $130 billion, implying the 44% needed reserve increase implied by AM Best is at the low end of our range, with the reserve shortfall varying materially from insurer to insurer.
Over 50% of the IBNR reserve need we estimate is for expected future emergence of losses associated with peripheral defendants, such as those who manufactured pumps or boilers with asbestos in the gaskets or those who produced machinery with asbestos in the brakes, as opposed to defendants who were involved in the manufacture or distribution of asbestos itself.
Insurers who wrote low-level to mid-level umbrella and excess liability policies for such peripheral defendants are receiving notices of asbestos claims impacting their layers, and such emergence among peripheral defendants has not shown any signs of slowing down, with the magnitude of such emergence in 2017 to 2019 often similar to the magnitude observed in 2010 to 2012.
As of year-end 2019, the U.S. insurance industry has recognized approximately $43 billion in losses for pollution liabilities stemming from policies written in 1985 and prior (including $38 billion in payments, $2 billion in case reserves, and $3 billion in IBNR reserves). In 2018, AM Best increased its estimate of the ultimate losses for the industry from $42 billion to $46 billion, which would imply the total reserves currently booked of $5 billion would need to be increased 60%. Our own estimate of ultimate losses for pollution range from $45 billion to $55 billion, with the AM Best estimate again close to our low end. Our view of this ultimate loss is higher now than in the past, in reaction to the following:
A combination of the #MeToo movement, a more plaintiff-friendly litigation environment, and the enacting of reviver statutes has resulted in an influx of sexual abuse claims against a number of insureds, including Catholic Church dioceses, USA Gymnastics, the Boy Scouts of America, schools, and various other agencies that involve children. Many of these claims are filed against policies from old policy years, as the reviver statutes permit claims against policies that would have otherwise been time-barred. The emergence of new claims has even led to the Boy Scouts of America filing for bankruptcy earlier this year.
Some insurers have reported increased provisions for such claims in the second quarter of 2020, including Chubb and Hartford (who announced reserve increases of $259 million and $102 million, respectively). While this exposure is still emerging and it is too early to estimate the full impact, companies with insureds who are vulnerable to such claims should monitor the exposure and consider including a judgmental provision even if a precise estimate is difficult to determine.
Thousands of lawsuits have been filed against Johnson & Johnson and other companies related to exposure to talc. Some of these lawsuits allege exposure to asbestos contained within the talc, while others allege that exposure to talc itself causes ovarian cancer.
Some insurers group talc claims with asbestos claims, while others track them separately. A Bloomberg Intelligence litigation analyst estimated in 2018 that Johnson & Johnson alone could pay as much as $20 billion related to such claims, and they are not the only party named in such suits; the extent to which such payments might be covered by insurance is uncertain at this point.
Claims alleging negative effects from exposure to various chemicals have been filed for many years, for many different products. Historically this has included claims related to Agent Orange and diethylstilbestrol (DES). Around 2005, we saw a significant rise in claims related to diacetyl. One of the more recent examples is glyphosate, a chemical that in June 2020 resulted in a $10 billion settlement for Bayer to settle over 95,000 lawsuits brought against Monsanto related to the use of this chemical in its popular weed killer Roundup. To what extent this will result in payments by insurers remains to be seen, as does what will emerge as the next chemical targeted in class action lawsuits.
We continue to see significant development on older policies written for the construction industry, as the frequency of multimillion-dollar claims has increased in recent years. This is particularly an issue for insurers that wrote umbrella and excess policies, where although notices may have been received in a timely fashion, the information needed to establish meaningful case reserve for the layer may not be available until 15 to 20 years after the policies were written.
Numerous lawsuits have been filed against opioid manufacturers and distributors over the last few years, alleging that these companies have played a role in creating a national opioid crisis over the last decade. A handful of companies have announced settlements aggregating $60 billion, and many claims continue to be filed by plaintiffs. The extent to which insurers will pay for these matters is still to be determined, as they have strong coverage defenses, including whether the lawsuits allege “bodily injury,” whether that bodily injury has been caused by an “occurrence,” and whether the conduct causing the losses is “accidental” or “expected or intended.” Some have likened the opioid litigation to tobacco litigation, where the insurance industry was largely insulated from significant payments in spite of the $200+ billion settlement.
While opioids have certainly been in the news in recent years and the potential associated settlements are large, they are not the only pharmaceutical product with large class action claims. Last year, an $8 billion verdict was awarded against Johnson & Johnson related to Risperdal and pharmaceutical companies are seeing an increase in claims related to products such as Zantac, Elmiron, Valsartan, Zostavax, and Belviq, presenting challenges to both the pharmaceutical companies and their insurers.
Commercial insurers are facing a number of challenges in the current environment, as COVID-19 affects their operations, their financials, and their insureds. While today’s challenges must be met, the liabilities for past policy years cannot be ignored. Those who have best addressed these runoff issues—either through in-depth reserve studies or through transactions such as adverse development covers or loss portfolio transfers that limit or remove the downside risk—are in the best position to devote their energy to current and future profitability.
Raji Bhagavatula, Mark Goldburd and Jason Russ are Fellows of the Casualty Actuarial Society and consulting actuaries in the New York office of Milliman. The estimates, thoughts and opinions contained herein are those of these authors and not necessarily those of Milliman or others within Milliman.
The current impact of legacy losses
It’s important to consider the impact of potential legacy losses not only in the context of establishing an appropriate reserve, but to form a view of the load for mass torts needed to price current policy years.