NEW YORK, June 6, 1997 — Total Incurred losses and loss adjustment expenses (LAE) for environmental and asbestos (E&A) liability claims dropped by almost half to $5.8 billion in 1996 from an unusually large $11.0 billion in 1995, according to an analysis by Insurance Services Office, Inc. (ISO).
Incurred losses and LAE (including legal defense costs) represent property/casualty insurers' total costs in a given period for indemnifying policyholders for insured claims, including both sums already paid and additions to reserves (the amounts insurers have earmarked for unpaid claims).
"Incurred losses and LAE for environmental liabilities alone last year declined for the first time since 1991 — the first year for which all insurers were required to report such data," said John J. Kollar, ISO vice president.
Environmental incurred losses and LAE dropped 56 percent in 1996 to $3.5 billion from 1995's $7.9 billion. Asbestos incurred losses and LAE declined 26 percent in 1996 to $2.3 billion from $3.2 billion in 1995.
"But the amount insurers actually paid for E&A losses and LAE rose in 1996," Kollar said. "Incurred losses declined only because insurers set aside funds for future payments at a slower rate," Kollar added.
Paid losses and LAE for E&A claims in 1996 climbed 29 percent to $4.2 billion from $3.3 billion a year earlier. Paid environmental losses and LAE rose 11 percent in 1996 to $2.2 billion from $2.0 billion in 1995, while paid asbestos losses and LAE rose 58 percent to $2.0 billion from the previous year's $1.3 billion.
"We estimate that from 1991 through 1996, payments for E&A claims totaled $16.7 billion, with environmental claims accounting for 55 percent of the six-year total," Kollar said.
Insurers have been continually increasing their E&A reserves — both for claims already reported and those incurred but not reported — since 1991. ISO estimates that these reserves increased by just $1.6 billion last year to $28.4 billion at year-end 1986.
In 1995 insurers increased their reserves for E&A losses and LAE by $7.7 billion — nearly five times as much as they increased reserves in 1996. The substantial additions to reserves in 1995 may have been triggered by new reporting requirements making insurers disclose their E&A liabilities.
Kollar said that the industry's combined ratio would have been 2.3 percentage points lower in 1996, if not for E&A claims. (The combined ratio indicates how much insurers have incurred in claim costs and other expenses for every dollar of premium they have taken in.)
ISO based its latest analysis of E&A liability on data from more than 900 insurance companies, representing about 92 percent of industry's E&A exposure.