Industry Updates
On the Horizon
AM Best: Food additives could be next A&E risk.
Brian O’Larte
AM Best estimates insurers have funded 91% of their aggregate asbestos and environmental exposures, but must continue to watch for new risks, said AM Best Director Brian O'Larte.
AM Best's annual estimate on asbestos and environmental losses for the U.S. P/C industry remained unchanged for year-end 2019. The industry has funded 91% of its aggregate asbestos and environmental exposures, leaving an unfunded liability of approximately $9 billion for asbestos and $4 billion for environmental costs, according to the Best's Market Segment Report, AM Best's A&E Loss Estimates Remain Unchanged.
O'Larte recently sat down with AMBest TV. Following is an edited transcript of the interview.
This report notes that the unfunded liability is a relatively small amount in comparison to the cumulative losses, and that the reserves have diminished. Can you walk us through that loss payment side as it's developed over the past decade?
Even though loss payments have outpaced the industry's incurred losses for both the asbestos and environmental, the loss payments have also declined over the same period. In the earlier part of the five-year period, there have been some sizable claims settlements that mainly were driven by the larger carriers.
The large claims settlements have happened over the past 30 years or so every so often, which caused the spike in the loss payments. However, over the past couple of years, there haven't been any large settlements, which has also contributed to the decline in payments.
What's been driving the decline in annual incurred losses over the past five years?
As we are talking about the overall asbestos and environmental incurred losses declining, it's best to look at each one separately. The asbestos incurred has declined at a faster rate than the environmental.
One of the main reasons is that a number of years ago, the large carriers have taken a deeper analysis or review of these asbestos exposures. We call this a ground-up study. This review has caused some significant reserving action or strengthening for these reserves.
It should be noted that these reviews continue, and on a probably every three-to-five-year basis. That's where we would see some spikes in the asbestos incurred, but the more recent ground-up studies have shown less development or strengthening than in years past.
We were expecting this to happen as companies are getting more comfortable with their exposure.
On the environmental side, losses incurred has fluctuated within a narrow band over the past five years. In 2015, the incurred was $800,000, and in 2019, it was $600,000, but still at a declining rate.
The reasoning is very similar to the asbestos issue. These spikes are driven by the ground-up studies, where we see the peaks in the incurred. Over the past three or four years, we haven't seen any kind of development, and so the incurred has been declining.
The report places a potential new exposure on the A&E horizon, which pertains to a pair of food additive compounds, the primary one of which has been in use since 1947. What development has brought this into play?
As analysts at AM Best, we constantly look for what could be the next asbestos in the industry, the big unknown. These two additives, BHA and BHT (butylated hydroxyanisole and butylated hydroxytoluene) caught an analyst's eye. Similar to the asbestos, where asbestos was an excellent electrical insulator, for many years it was used for building materials.
They started seeing some health concerns, just like we're seeing in BHA and BHT. However, so far, there have not been many, if any, coverage issues or litigation issues, but we're going to keep an eye on this. This could be the next big unknown.
