The Asbestos Epidemic - How will UK insurers cope
How will UK insurers cope with growing claims?
Published by the Post, Spring 2002.
Today, around 1,500 people die from Mesothelioma in the UK every year. About double that number are thought to die from asbestos related lung cancer. These figures are set to rise until about 2020. Surprisingly, there is little indication that the UK insurance industry is making adequate provision to cope with future claims. Andrew Morgan, solicitor on behalf of asbestos claimants at Field Fisher Waterhouse LLP, examines the scale of the problem and suggests UK insurers plan ahead.
Background to asbestos claims
In the 1950s and 1960s, laggers, pipe fitters, welders, carpenters and other trades came into regular contact with asbestos. Today, they are developing asbestos diseases. For decades claimants suffering from asbestos related illnesses have been awarded compensation. In certain cases, state benefits are also available. UK insurers already face an unprecedented burden as a result of the steady increase in asbestos claims.
The Fairchild Judgement
Last year's House of Lords judgment in Fairchild v Glenhaven Funeral Services Ltd and other cases is considered by some to be a serious blow to UK insurers. In practical terms, though, the judgment merely restores the status quo that was abandoned by the High Court decision which denied Mrs Fairchild compensation following her husband's death from mesothelioma.
What are the repercussions?
Before 1960, even using the best scientific and medical knowledge, industry could not have predicted the scale of the financial risk that is caused by exposure to minute amounts of asbestos. In addition, premiums were set too low by insurers, possibly to gain a competitive advantage at the time or because weaker regulation of the insurance industry permitted it. The result is that insurers have not made sufficient provision to deal with the current level of asbestos claims in the UK.
This underprovision caused the recent liquidation of two substantial Employer's Liability (EL) insurers (Chester Street/ Iron Trades, Builders Accident). Affected asbestos claimants are granted limited protection by the Financial Services Compensation Scheme (FSCS). A levy on the insurance industry funds the payments made by the FSCS.
Another consequence is that some solvent employers facing claims are unable to transfer liabilities to their insurers, despite having paid premiums for cover. Companies in this predicament cannot claim any cover from the FSCS so the remaining insurers and indemnifies must now share the liabilities of Chester Street and Builder's Accident.
Insurers feeling the pinch
Insurers are already under considerable financial strain at the moment. The falling value of equity investments, "climate change liabilities and the events of 11 September in 2001 are taking their toll. It is not surprising that the insurance industry fought hard to wipe out future asbestos claims in the Fairchild case. In defeat, the ABI assessed the expense of asbestos claims at about £200M annually. This is a large sum, but one which UK and European insurers in the UK are managing to bear.
The future of claims
Future asbestos claimants could be guaranteed compensation by a properly regulated and healthy private sector or by state guarantee. Neither option is without its downside. In the UK, the state makes some limited provision for those suffering from asbestos diseases but EL insurance has been compulsory for over 30 years. The Government is understandably reluctant to take on liabilities from insurers who have received premiums. At the same time, asbestos related insurance insolvencies have struck a severe blow to private sector confidence. Serious questions are now being raised with the FSA as to the adequacy of insurers' present liquidity ratios.
Pressure is mounting for the Government to revise the FSCS arrangements so that employees receive full compensation, and for compensation to be paid when the insurer of a defunct employer cannot be traced.
Can insurers afford it?
Before 1965, it would have been impossible to predict accurately the current cost of asbestos disease claims because there was not sufficient medical knowledge available. Today, there is no doubt that asbestos claims will continue to cost insurers dearly. This predictability means that the insurance market should plan for and meet these future liabilities, if it is to retain its reputation.
Developments in the US
The greatest threat to the UK and EU insurance industry in relation to asbestos disease claims does not come from domestic claims, but from claims in the USA.
The US case of Federal Mogul and its UK subsidiary T&N PLC is an example. Federal Mogul has obtained Chapter 11 protection in the US as a result of the level of asbestos claims it is facing. Consequently, its UK subsidiaries (including T&N PLC) were put into Administration. For some time, T&N has paid compensation to asbestos claimants without difficulty. Now, as a result of the Administration Order, it is prevented from making the payments which it could otherwise afford. The liability for these claims has therefore been thrown upon T&N's insurers.
The insurers have discovered that T&N's promise to indemnify them has been rendered worthless by the actions of a US court in relation to a US company that was unconnected to T&N when the insurance policy was issued. Who would have foreseen such an outcome?
The dilemma facing UK insurers is whether or not past premiums and current income are enough to meet future liabilities without the need for state intervention. One thing is certain, the UK insurance industry will need to keep a careful eye on developments in the US.
For further information, please contact Andrew Morgan.