CAS Seminar on Ratemaking Megatort Update Alison Drill, FIAA, MAAA Trevar Withers, ACAS, MAAA TILLINGHAST – TOWERS PERRIN Tampa, Florida March 7-8, 2002

2 Current and Potential “Megatorts” Excluding asbestos, mold, pollution, terrorism and tobacco What factors cause or contribute to a “megatort”? How have these factors changed in recent years? What impact will these changes have on future costs? Current status and the outlook for: Silicone Breast Implants (SBI) Lead Drugs and medical devices Electromagnetic Fields (EMF) Other emerging megatorts

3 Most costly megatorts include some or all of these factors... Large exposed population Substantial bodily injury (BI) or property damage (PD), often with long latency periods Causation of BI or PD relies on expert testimony Signature diseases (e.g., asbestosis) Injured parties’ propensity to sue Contingency legal fees & class action lawsuits Many exposed policies Favorable judicial and legislative climate Large indemnity and/or defense expenses to insurers

4 Changes for plaintiffs and corporations? Potential plaintiffs Technology and the internet have improved identification & information sharing Propensity to sue stable (or increasing?) Corporations Better risk management may speed identification of potential injuries and mitigation Increasing cost of insurance Higher levels of risk retention & self-insurance Wider product distribution, but better safety standards

5 Changes for legal system? Tort reform Stricter standards for technical evidence and use of expert witnesses (e.g., Daubert rules in 1995) Limitations on damage awards Shift towards continuous triggers for coverage (e.g., Montrose decision) Class actions more common Multi District Litigation (MDL) Large contingent fees for attorneys Greater motivation for defendants to settle May increase size of plaintiff pool Alternative dispute resolution

6 Changes for insurers? Underwriting standards Coverage wording tightened (e.g. “loss in progress” exclusions, occurrence definitions) Aggregate coverage limits Requiring insureds to retain more risk (e.g. SIRs or experience rating) Higher defense expenses Shift to expense within policy limits Improved claims management with toxic tort specialists Declaratory judgement actions on coverage issues Reinsurance availability and cost

7 What is the impact of these changes? Plaintiffs and legal system increasingly looks to class action litigation to tort damage Corporations and insurers attempt to respond more quickly with better risk management Most other megatorts in litigation involve limited number of plaintiffs and insurers Lower likelihood of another “asbestos” sized megatort Examples of current and emerging megatorts on following pages, none of which are likely to be as costly as asbestos

8 Silicone Breast Implants (SBI) Manufactured 1962 to 1991 Alleged bodily injuries: fatigue, cancer, auto-immune disorders Defendants: limited number of manufacturers Recent scientific studies doubt causation, but many insurance settlements already done Settlements by Dow Corning ($3.2 billion) and other major manufacturers Dow Corning in bankruptcy; joint reorganization plan approved 1/2002. (few outstanding appeals remain)

9 Lead Lead paint and other lead products (e.g., water pipes, lead- containing gasoline, ceramics) Defendants are landlords, housing authorities & municipalities and pigment/paint manufacturers Mitigation costs and bodily injury to exposed children, building occupants, construction workers Legislation & courts driving lead abatement EPA “pre-renovation” rule in place Market-share laws State/city suits versus lead paint industry Lead exclusions included sporadically by insurers

10 Drugs & Medical Devices DES litigation continues with 2nd & 3rd generation claims Norplant settlement proposed Fen-Phen & Redux diet drugs manufactured by American Home Products: class action settlement of $3.75 billion Contaminated blood products (HIV and Hepatitis C): US hemophiliac exposures now generally settled Anti-diabetes drug Rezulin Heartburn medication Propulsid Anti-depressant Prozac Anti-cholesterol drug Baycol

11 Other megatorts already in litigation.. Chemical exposure claims continue but are generally limited to few insureds, (e.g., benzene, Agent Orange) MTBE: widespread contamination of groundwater Latex gloves: plaintiffs mostly medical profession; exposure concentrated with glove manufacturers, MDL underway in Pennsylvania Gun manufacturers: increasingly sued by individuals and cities/counties; federal judge ruled in 11/2000 case that insurers have no duty to defend or indemnify Chromate Copper Arsenate: chemical used in pressure treated wood, including playground equipment, which contains arsenic, a known carcinogen

12 Potential megatorts with litigation looming... Diet drugs: Metabolife complaints EMF: Studies continue regarding effects (e.g., cell phones). Causation difficult to prove, litigation less likely Genetically modified food: political issues versus scientific evidence Gulf War Syndrome: studies validate veterans’ concerns HMO: claims under RICO and ERISA Intellectual capital: Napster litigation settled, but Supreme Court to review copyright laws