Coverages and Strategies

Transcription

1 THE QUARTERLY REVIEW OF ADVANCED RISK MANAGEMENT STRATEGIES VOL. 23 NO. 1 SPRING 2009 Coverages and Strategies Climate Change Is Heating Up D&O Liability Carol A.N. Zacharias D&O Indemnification Following Schoon v. Troy Costa N. Kensington and Wendy Williamson Cooperative Electronic Discovery in Mid-Size Cases William W. Belt, Jr., and Mark S. Yacano Marriage of Workers Compensation and EPL Insurance Donald V. Hale and Allan M. Muir, Esq. Financing Your Risk Program 2009 David F. Brauer Forecasting Mesothelioma Jessica B. Horewitz and Jorge Sirgo Insurance Strategies Side Agreements Loss Control Cell Phone Liability ISO on Enterprise Risk Management Playing a Hunch Commentary Keeping Tabs on Your Insurers Insurance Law Law and Disorder

2 The ability to accurately forecast asbestos-related liability is vitally important to some companies. Here is an improved method of forecasting. Forecasting Mesothelioma: Improvements in the Nicholson Methodology Are Better Predictors of the Recent Past JESSICA B. HOREWITZ AND JORGE SIRGO Since the 1970s, numerous U.S. companies have been named in product liability lawsuits that allege disease related to asbestos exposure. In the past 10 years, those claims have reached into the hundreds of thousands for some companies and have driven between 75 and 100 companies into bankruptcy. The ability for a company to forecast the magnitude of its asbestos exposure and the potential for future liability is of great concern to those companies that have been named, as well as to those companies that believe they might be named in the future. Corporate risk managers use such forecasts to best protect a company from possible financial shocks to the system that haven t been included in the company s business plans. With analytical tools at their disposal, previously unexpected shocks can be anticipated and quantified, limiting the uncertainty and allowing companies to react quickly if such shocks occur. In fact, some companies have had the pleasant surprise of being able to reduce asbestos reserves in response to new models and data analyses. Similarly, updated models may also assist a company in evaluating a potential acquisition by forecasting greater-than-anticipated future asbestos-related liabilities for the target entity. Corporations benefit by having an analytical forecast at their disposal rather than a guesstimate of asbestos-related liabilities. Getting as accurate a 57

3 58 The John Liner Review forecast as possible further reduces uncertainty. The selection of an appropriate forecast is of critical importance for companies that rely on such forecasts to make a bankruptcy decision, make reserve decisions, report liabilities to the SEC, decide whether to merge with or purchase another company, or better understand their potential liability. In particular, these companies are keenly interested in the future number of claimants with the most severe asbestosrelated disease, mesothelioma. We compare Nicholson s projection of the incidence of mesothelioma to an update to the Nicholson approach. Comparison of Forecasting Methodologies In 1982, William J. Nicholson, George Perkel, and Irving Selikoff published a landmark study (hereafter referred to as Nicholson) forecasting asbestos-related disease into the future. 1 Their methodology examined members of the U.S. labor force that could have been exposed to asbestos and built up the potential future disease expression into a national forecast. As suits have been instituted by alleged victims of asbestos exposure, the Nicholson methodology has been used by corporations, insurers, academics, consultants, and others to help companies in various positions in this mass tort litigation situation to better understand their liabilities or potential liabilities. New forecasts of the incidence of asbestos-related disease based on updated or altered methodology emerged as early as the 1990s. This article focuses on updates to the Nicholson projection and assessment of the accuracy of projections that have been produced regarding the incidence of mesothelioma. In particular, we compare Nicholson s projection of the incidence of mesothelioma to an update to the Nicholson approach developed by Navigant Consulting, Inc. (NCI). 2 In addition, we examine both Nicholson s and NCI s projections of the incidence of mesothelioma relative to the historical trend of the actual incidence of mesothelioma. Actual incidence data are current through Therefore, comparisons of each forecast to actual experience allow us to evaluate the ability of each forecast to predict (what we now call) the past. The Question Posed The question we will attempt to answer is, Which forecast is the better predictor of the incidence of mesothelioma? This article is structured in the following manner. The updates to the Nicholson methodology used to generate the NCI forecast and the resulting differences in the two projections are outlined; the practical implications of using different incidence projections to estimate future claims are detailed; the data on the actual incidence of mesothelioma that is available for comparison is presented; and a statistical test is performed to compare the projections. Our Conclusion The NCI projection of the incidence of mesothelioma with its updates to the Nicholson framework is statistically closer to actual incidence of mesothelioma in the United States than is the Nicholson projection without adjustments. These facts are the foundations for this conclusion. The NCI-projected incidence of mesothelioma cannot be distinguished from the historical trend of the actual incidence of mesothelioma over the past 33 years. The differences between the historical trend of the actual incidence of mesothelioma and the Nicholson forecast of mesothelioma are likely not random. NCI s Update of Nicholson s Methodology The methodology used by NCI to estimate the

4 Vol. 23, No. 1, Spring incidence of mesothelioma builds on the approach and data published by Nicholson. The Nicholson approach is based on the following components: the number (and distribution by age cohort) of exposed workers by year in 11 industries; the general mortality of these populations; the duration and intensity of fiber exposure; and the application of a dose-response formula to determine the incidence of asbestos-related mesothelioma that will occur in these populations into the future. The methodology of the Nicholson approach has not been modified by NCI. Instead, the modifications NCI has made are to the key assumptions in the Nicholson approach. These modifications to the key assumptions are the result of NCI s industry knowledge and experience and represent updated information that became available after the publication of the Nicholson report. Exposed Labor Force Nicholson s estimate of the population at risk for asbestos-related diseases includes the number of workers first exposed to asbestos in 11 industries from 1940 through Nicholson s estimate is based on a total of 27.5 million workers from these 11 industries that were employed currently in 1940 and those newly hired during the 1940s, 1950s, 1960s, and 1970s. While NCI has not modified the total of 27.5 million workers estimated by Nicholson to have been first exposed between 1940 and 1979, NCI has disaggregated Nicholson s numbers to an annual level. 4 For example, Nicholson estimated 223,000 new entrants to the utility services industries were first exposed to asbestos in the years NCI assumes that an equal number of workers (22,300 = 223,000 10) in this industry were first exposed in each of the years from In addition, NCI has extended Nicholson s exposed population estimate to account for the workers potentially first exposed from 1980 through Using Bureau of Labor Statistics (BLS) and Census Bureau labor force data, the NCI update to Nicholson s methodology has added an additional 13.6 million exposed workers, for a total of about 41.1 million. The Nicholson approach also distributes each timespecific population of new entrants by age. Nicholson used a study published by BLS that reported the age distribution of new manufacturing employees as of NCI has modified the age distribution assumption according to the age distribution of the male manufacturing population during a given exposure year for each cohort. 6 Each exposure-year cohort is aligned with the age distribution of that census year. The information used to create these distributions comes from 1940, 1950, 1960, 1970, 1980, 1990, and 2000 Census Bureau data. 7 Age distributions for 1945, 1955, 1965, 1975, 1985, and 1995 exposure year cohorts are derived as the average of the most recent and following Census Bureau data. For example, the age distribution for male manufacturing workers exposed in the 1955 exposure year cohort is based on the average of the age distributions for male manufacturing workers in the 1950 census and the 1960 census. The methodology of the Nicholson approach has not been modified. Instead, the modifications are to the key assumptions in the Nicholson approach. Duration and Intensity of Exposure In the Nicholson approach, both the duration of exposure and the levels of exposure are considered in order to estimate the cumulative dose of asbestos fibers to which a worker was exposed. The Nicholson approach uses the average duration of employment in each decade for each industry as well as a distribution of workers with short-term and long-term exposure. 8 The NCI approach uses the same information presented by Nicholson to further delineate the number of exposed workers by duration of employment. The exposed work force is distributed by duration of employment using a bimodal distribution formula to account for a portion of the work force with a high rate of turnover. This creates a work force with

5 60 The John Liner Review a mixture of two mean distribution periods (i.e., short- and long-term). According to the Nicholson approach, workers were exposed to varying levels of airborne asbestos, depending on the industry and the trades in which they were employed. Accordingly, the level of asbestos to which workers were exposed is based on the estimated average annual fiber exposure in each of the 11 industries. Nicholson reported a fiber exposure, measured by fibers per cubic centimeter, for insulation workers. 9 The fiber concentrations for the other industries were calculated by using a relative measure of risk also provided by Nicholson. 10 The NCI approach does not factor into its approach Nicholson s reduction in the relative risks for specific industries for 1972 through 1979 to allow for adoption of control measures. 11 As discussed later, we find that the forecasted incidence of mesothelioma better follows the historical trend of actual incidence of mesothelioma when Nicholson s guidance to reduce relative risks during that period is ignored. This may suggest that compliance was delayed or that the permissible exposure limits (PELs) during those years were too high to decrease risk to the degree that Nicholson assumed or both. 12 Nicholson does not provide relative risk measures beyond exposure year The NCI approach extends the Nicholson approach to account for fiberlevel exposure in years after The NCI approach uses the maximum allowable exposure under OSHA regulations as the level of asbestos to which workers were exposed each year after General Mortality As each population ages from its first year of exposure, a portion of the population is lost due to normal mortality (expected deaths, not necessarily related to mesothelioma, but from any cause). Nicholson s projections utilized an estimate of total mortality in the United States from The NCI update to Nicholson s approach is to use updated mortality data that includes projections of mortality rates. NCI obtains period life tables from the Social Security Administration (SSA) as published annually in their OASDI (Old Age, Survivors, and Disability Insurance) Trustees Report. The mortality tables obtained Exhibit 1 Mesothelioma Projections Incidence Nicholson NCI Year

6 Vol. 23, No. 1, Spring from SSA contain information for males and females aged 0 through 119 in the years 1900 through Dose-Response Formula The Nicholson approach uses a dose-response methodology to project the number of asbestos-related deaths from mesothelioma, lung cancer, and other cancers. In 1983 (one year after the publication of Nicholson s report), OSHA (Occupational Safety and Health Administration) first released its asbestos-exposure risk models for mesothelioma and lung cancer. Three years later, after solicitation of public comment, numerous hearings, and peer review, OSHA published its final rulemaking and risk assessment models. 14 To date, the models in the 1983 publication have not been revised and have been adopted by forecasters, the courts, and auditors as being appropriate and acceptable. To estimate and project the number of claims alleging mesothelioma due to asbestos exposure, NCI utilizes the dose-response model published by OSHA, which estimates mesothelioma mortality resulting from asbestos exposure. The OSHA mesothelioma dose-response model is a model for absolute risk (as was the model used in Nicholson s approach). Absolute risk is defined as the number of observed deaths per person-years at risk. The model defines the absolute risk as a function of time since first exposure, exposure duration, and average fiber concentration. Comparison of Projections Nicholson s projection of the incidence of asbestosrelated mesothelioma extends from 1967 through 2027 in five-year intervals (e.g., 1967, 1972, 1977, etc.). NCI s update of the Nicholson approach produces a projection of annual deaths for each year from 1973 through A plot of the two projections is shown in Exhibit Over the period 1973 through 2027 (where both projections have values), the Nicholson forecast of asbestos-related mesothelioma totals just under 123,000 individuals and peaks in 2002, while the NCI forecast of asbestos-related mesothelioma totals just over 105,000 individuals through 2027 and peaks in The implications of this disparity in the forecasts are discussed in the following section. How Projections Are Used in Estimations In practice, the number of claims alleging mesothelioma that will be filed in the future is typically estimated using incidence projections based on the Nicholson approach. These incidence projections represent the potential number of injuries in any given year. Typically, the estimated number of claims alleging mesothelioma that may be filed in the future is based upon a fraction of these potential injuries. This fraction is commonly referred to as the propensity to sue (i.e., the portion of potentially injured individuals that have historically filed claims over a period of time). The model defines the absolute risk as a function of time since first exposure, exposure duration, and average fiber concentration. For example, if the projected incidence of mesothelioma in a given year is 1,000 and 500 claims alleging mesothelioma are filed in that same year, the propensity to sue is 50 percent (50 percent = 500 filings 1,000 incidence). The propensity to sue value is used to estimate the number of claims alleging mesothelioma that may be filed in the future. If, in the first year of the forecast period, the estimated incidence of mesothelioma is 800, then the estimated number of claims alleging mesothelioma that may be filed in the first year of the forecast is 400 (400 = 800 incidence 50 percent propensity to sue). This calculation of the estimated number of claims alleging mesothelioma that may be filed is performed for each year of the forecast period. As Incidence Increases, Propensity to Sue Will Decrease Proportionately, and Vice Versa A projection of incidence that is large does not necessarily translate into any larger number of claims alleging mesothelioma that may be filed in the future than does a projection of incidence that is small. Because the propensity to sue is a relative measure to the incidence projection, the scale or magnitude of the incidence projection is irrelevant to the estimated number of claims alleging mesothelioma that may be filed in the future. For a given number of claims, as incidence increases, propensity to sue will

7 62 The John Liner Review Exhibit 2 Mesothelioma Projections Year Incidence A Propensity to Sue A Future Filings A Incidence B Propensity to Sue B Future Filings B Incidence C Propensity to Sue C % N/A 1,000 10% N/A 2,750 4% N/A % % 80 1,150 4% % % % % % % % % % % % % % % % % % % % % % % % % 0 Total 1, , , Future Filings C

8 Vol. 23, No. 1, Spring decrease proportionately, and vice versa. As a result, if two incidence curves differ only in magnitude (not shape), multiplying incidence by propensity to sue will produce the same number of projected claims. For example, if the projected incidence of mesothelioma in a given year is twice as large as in the example above (2,000 individuals instead of 1,000), but the number of claims filed is the same, the propensity to sue is 25 percent (25 percent = 500 filings 2,000 incidence). If the second incidence curve has the same shape as the first that is, the incidence is consistently twice as large as in the first example (say, 1,600 individuals instead of 800 for the first year) then, when the new propensity to sue is applied, the projected number of claims is exactly the same as in the first example 400 for the first year (400 = 1,600 incidence 25 percent propensity to sue). Shape of Incidence Forecast Makes a Difference However, a difference in the forecasted number of claims can occur if the shapes of the incidence forecasts differ. For example, assume that in 2008, a nine-year (2008 through 2016) forecast of the number of future claims alleging mesothelioma is desired. It is assumed that the number of claims that may be filed alleging mesothelioma in the future is likely to resemble the relationship between claims filed in 2007 (assume 100 claims filed in 2007) and the estimated incidence in In addition, three separate incidence projections are available (Incidence A, Incidence B, and Incidence C). The projected incidence from both Incidence B and Incidence C is much larger than the projected incidence from Incidence A (see Exhibit 2). As the information in Exhibit 2 shows, the forecast of the number of future claims alleging mesothelioma is the same for Incidence A and Incidence B despite the disparate magnitude in the two projections of incidence. While the magnitude of Incidence C is the largest, the forecast of the number of future claims alleging mesothelioma generated from Incidence C is the smallest. As the example shows, the scale or magnitude of the incidence projection is irrelevant to the estimated Exhibit 3 SEER Incidence 3000 Diagnoses of Mesothelioma Diagnosis Year Source: Surveillance, Epidemiology, and End Results Program of the National Cancer Institute of the National Institute of Health.

9 64 The John Liner Review Exhibit 4 SEER Incidence of Mesothelioma and Trend Line Diagnoses SEER Smoothed SEER Diagnosis Year Exhibit 5 Relative Share of SEER Trend Line, Nicholson, and NCI Projections Diagnoses Smoothed SEER Nicholson NCI Diagnosis Year

10 Vol. 23, No. 1, Spring number of claims alleging mesothelioma that may be filed in the future. The key factor that determines that number is the shape of the incidence projection. The reason why the forecast of the number of future claims alleging mesothelioma generated from Incidence C is the smallest is because the incidence during the forecast period (i.e., 2008 through 2016) as a relative share of its overall incidence (i.e., 2007 through 2016) is smaller than that of either Incidence A or Incidence B. The share of Incidence C during the forecast period is just over 53 percent of total incidence, while the share of both Incidence A and Incidence B during the forecast period is nearly 69 percent of total incidence. The share of the Nicholson projection during 2008 through 2027 is just over 32 percent of total incidence (1973 through 2027) while the share of the NCI projection during 2008 through 2027 is about 34 percent of total incidence (1973 through 2027). As a result, the use of the Nicholson projection would result in a lower projection of the number of future claims alleging mesothelioma than the use of the NCI projection. Varying Projections of Incidence Lead to Different Projections of the Number of Future Claims Based on the example above, it is clear how alternative projections of incidence lead to different projections of the number of future claims alleging mesothelioma. The selection of an incidence model with a shape that most closely captures actual historical experience is likely to provide superior estimates for companies that employ a forecast methodology to arrive at an estimate of future claims or liabilities. The following sections discuss a way to determine how to choose the most appropriate projection of incidence by way of a comparison to historical trends observed in actual incidence of mesothelioma. SEER Data The historical incidence of mesothelioma diagnoses in the United States has been tracked by the Surveillance, Epidemiology, and End Results (SEER) program of the National Cancer Institute of the National Institutes of Health since As a result, using the annual observations of U.S. mesothelioma incidence from SEER appears to be a reasonable basis by which to test projections of incidence. 17 A plot of the SEER incidence appears in Exhibit 3. The incidence of mesothelioma diagnoses as measured by SEER is available from 1973 through Although the incidence as measured by SEER appears to have a general trend, the data series appears to have some notable variability from one year to the next. Choosing an Appropriate Projection of Incidence In order to make the comparison between the incidence of mesothelioma as measured by SEER and the incidence forecast by either the Nicholson or the NCI projections, the incidence of mesothelioma as measured by SEER should be smoothed to reveal the underlying historical trend in mesothelioma incidence. Exhibit 4 shows the incidence of mesothelioma as measured by SEER with the best fitting smoothed trend line superimposed. 18 Now that the incidence of mesothelioma as measured by SEER has been smoothed, a comparison can be made to either the Nicholson or the NCI projections. A reasonable approach to this test is to assess the relative shares of total projected counts represented in each year and then compare them to the shares of counts in each year in the SEER incidence of mesothelioma. Exhibit 5 shows the relative shares of projected counts in each year for the smoothed SEER trend line and Nicholson and NCI projections. The purpose of this comparison of relative shares is to eliminate any scale or magnitude differences and, instead, to focus on the shapes of the projections. Exhibit 5 shows that the Nicholson projection has a relatively low share of incidence between 1978 through 1986 and then has a relatively high share of incidence after The NCI projection, like the actual incidence as measured by SEER, appears to have roughly the same relative share of count for each year of the projection. In summary, the NCI projection appears to more closely follow the smoothed SEER data than does the Nicholson projection. A more compelling comparison than the visual inspection of the data in Exhibit 5 can be made using the test of homogeneity of distributions. The statistical test cannot distinguish between the smoothed SEER incidence trend line and the NCI projection. 19 However, the same statistical test indicates

11 66 The John Liner Review that there is significant evidence to suggest that the differences between the smoothed SEER incidence trend line and the Nicholson projection are not due to random chance. The implications of our analyses are twofold: 1) that the updates to the Nicholson methodology have improved the projection of the incidence of mesothelioma in that the projection cannot be distinguished from generally accepted benchmarks; and 2) using the NCI projection will result in a forecast of a larger number of future claims alleging mesothelioma than using the Nicholson projection. Endnotes 1. Nicholson W.J., Perkel, G., and Selikoff, I., Occupational Exposure to Asbestos: Population at Risk and Projected Mortality, , American Journal of Industrial Medicine 3 (1982): NCI has developed this forecasting methodology under the names of various subsidiaries, including, but not limited to, Chambers Associates, Inc. However, the NCI name has been used in place of Chambers since April Nicholson, id., Table XII, p The NCI approach also makes use of collections of individual exposure years, or cohorts. The exposure-year cohorts begin with 1935 and end with 1975, increasing by five-year increments (e.g., 1935, 1940, 1945, etc.) for a total of nine exposure-year cohorts. For example, the 1940 exposure-year cohort is comprised of workers whose first years of exposure were 1940, 1941, 1942, 1943, and NCI created a 1935 exposure-year cohort (1935, 1936, 1937, 1938, and 1939) that is comprised of Nicholson s estimate of the number of exposed workers employed in Nicholson, id., Table XXI, page NCI establishes 17-, 22-, 27-, 32-, 37-, 42-, 47-, 52-, 57-, and 62-year-old age cohorts for a total of 10 age cohorts. Each age cohort represents a period of five years (e.g., the 22-year-old age cohort represents workers aged 20 through 24). 7. Because NCI could not obtain 1930 census information, the 1940 census information is applied to the 1935 exposure-year cohort. 8. Nicholson, id., Table XIII, p. 284 and p Ibid., Table XV, p Ibid., Table XVIII, p Ibid., p The PELs during the 1970s and early 1980s were significantly higher than today s 0.1 fibers per cubic centimeter (f/cc). The first limit, promulgated by the Occupational Safety and Health Administration at the end of 1971, was 5 f/cc (36 FR 23207). The limit was lowered to 2 f/cc in 1976 (37 FR 11318) and remained at that level until 1986 (see note 14). 13. The OSHA regulations published in the Federal Register (51 FR 22612) on June 20, 1986, indicate that OSHA established PELs of 0.2 f/cc determined as an eight-hour time-weighted average airborne concentration, effective July 21, OSHA lowered the PELs from 0.2 fibers per cubic centimeter to 0.1 fibers per cubic centimeter as published in the Federal Register on August 10, 1994 (59 FR 40964). This standard became effective October 11, 1994, and has not been changed since. 14. U.S. Department of Labor, Occupational Safety and Health Administration, Occupational Exposure to Asbestos: Emergency Temporary Standard, Federal Register 48 no. 215 (November 4, 1983): Values between the five-year intervals in Nicholson s projections are estimated using linear interpolation. 16. The NCI projection that does not ignore Nicholson s guidance to reduce relative risks between 1972 and 1979 totals just under 93,000 individuals through 2027 and peaks in The incidence from SEER may be an appropriate indicator, but it is not necessarily a direct measure of asbestos-related claims. SEER incidence is derived from a survey from a set of nationwide registries and does not delineate the underlying cause of the mesothelioma. Nevertheless, the SEER information is widely accepted in medical research. 18. Various smoothed trend lines were fit to the SEER incidence. These included a linear trend line as well as nonlinear trend lines that either peak or do not peak. The trend line that was chosen for our analysis was the one that statistics showed to be the best fit. 19. The NCI projection that does not ignore Nicholson s guidance to reduce relative risks between 1972 and 1979 is statistically different from the smoothed SEER incidence trend line, but not by much. Jessica B. Horewitz, Ph.D., is a director in the Washington, D.C., office of Navigant Consulting, Inc. Her practice focuses on long-term forecasting for product liability as well as complex litigation and damages analysis. Jorge Sirgo, M.A., is an associate director in the Washington, D.C., office of Navigant Consulting, Inc. His practice focuses on statistical analysis and analytical methods. Reprinted with permission from The John Liner Review, Volume 23, Number 1; Summer Copyright 2009, Standard Publishing Corp., Boston, MA. All rights reserved.