Uncertainty in Reserving

Some of the main uncertainties in projections and reserving are:

z inherent uncertainty in the projection methodologies, eg:  incomplete data on exposure (and often on claims)

 epidemiological models are not fully specified, eg unknown incidence rate at long

durations

z uncertainty about incidence of diseases arising from exposure in the 1970s – while total fibre consumption increased rapidly, how effective were fibre-type changes and industrial process improvements in the 1960s and 1970s in reducing risk?

z the possibility of a new source of claims arising from a legal precedent - e.g. in the same

way as the Crimmins decision established the Australian Government’s liability for stevedore claims

z uncertain outcomes from the NSW Inquiry into the James Hardie asbestos liabilities – on one hand it could result in increased costs for other defendants if the Foundation runs out of funds, but might reduce total compensation costs if the basis for compensating ARD claims is fundamentally changed (eg reduction of legal costs)

z the recent expansion of NSW jurisdiction to include larger numbers of interstate residents – will this continue or be addressed? (eg Schultz case)

z possibility of further peripheral defendants being brought in to share the cost of compensation, as has happened in the US

z possibility of new or expanded heads of damage - e.g. Sullivan & Gordon loss of service

compensation

z continuing debate over criteria for accepting lung cancer cases as asbestos-related disease compensable – potential for significantly higher proportion of lung cancer cases to be compensated

z improvements in diagnostic techniques and screening programs which identify more

asbestos-related disease cases could increase the total number compensated and/or bring them forward. Examples include not only improvements in CT scanning technology but blood tests such as those developed at the Sir Charles Gairdner Hospital which could predict years in advance whether someone will succumb to asbestos cancer

z improvements in mesothelioma treatments – these can be expensive and tend to produce small extensions of life expectancy therefore are likely to increase compensation costs. Examples include the Alimta and Lovastatin trials in the US, Vitamin A trials in WA and invasive surgical procedures such as a peritonectomy (removal of lining of the abdomen) which is performed typically on younger people at St George Hospital in NSW.

z potential for compensation of people with a fear or anxiety about developing mesothelioma z potential for claims for compensation for pain experienced by people with asbestos-related

z the extent to which other contributors to compensation are likely to be able to continue

making payments for compensation. Due to the long exposure periods and the principle of indivisibility of causation, it is quite likely that insolvency of one contributor may lead to a shifting of the claims to other solvent contributors to ensure there would be no reduction in compensation to ARD claimants

z the impact of any insolvencies among reinsurers covering past exposures.

The basis of reserving for ARD liabilities in Australia commonly assumes continuation of the current legal, medical and economic environment. Assumptions for future claim number development, superimposed inflation, etc, therefore reflect current conditions and a continuation of underlying trends observable from past data. A significant change in the environment, such as might arise from some of the potential issues listed above, would likely result in a change in the basis of reserving and consequently in the level of provisions.

The uncertain nature of these projections highlights the need for actuaries involved in ARD claims reserving to include a range of possible outcomes and to communicate clearly the considerable uncertainty in the estimates.

Abbreviations

AACR Australasian Association of Cancer Registries AIHW Australian Institute of Health and Welfare AMR Australian Mesothelioma Register

ARD Asbestos-Related Disease

ARPD Asbestos-Related Pleural Disease

DDB NSW Workers Compensation Dust Diseases Board DDT NSW Dust Diseases Tribunal

GIRO General Insurance Research Organising Committee of the Institute of Actuaries (UK)

HSE Health & Safety Executive (UK)

ICD International Statistical Classification of Diseases and Related Health Problems ICDO International Classification of Disease for Oncology

MRCF Medical Research and Compensation Foundation NCSCH National Cancer Statistics Clearing House (Australia) NHMRC National Health and Medical Research Council (Australia) NOHSC National Occupational Health and Safety Commission (Australia)

SEER The Surveillance, Epidemiology, and End Results (SEER) Program of the National Cancer Institute (US)

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