Over the past 30 years, corporations have paid out $70 billion for asbestos claims and related legal expenses. Seventy companies have filed for bankruptcy protection as a result. But it is estimated that, between 1940 and 1979, 27 million people in the United States had significant occupational exposure to asbestos—and the lawsuits keep on coming.

Actuarial and management consulting firm Tillinghast calls it the "$200 billion problem" and estimates that the cost of personal injury lawsuits in the United States reached $246 billion in 2003, an increase of 5.4 percent over the previous year. "In 2002 and 2003, the largest single contributor to the rise in tort costs was a significant upward reassessment of liabilities associated with asbestos claims, whose numbers have continued to mushroom," according to Tillinghast.

For commercial insurers, asbestos-related lawsuits represent the tip of the iceberg. Long-term exposure—or "long-tail"—claims now involve some 20 hazards, ranging from repetitive strain injury (RSI) to silicosis, radiation to toxic mold. In addition to threatening profitability, such claims are hugely difficult to manage. This problem goes beyond the shores of the United States. Many other countries, like the United Kingdom, are beginning to experience similar challenges. More importantly, many developing countries are still using asbestos and other hazardous material and are not yet aware of its long-term implications.

Unlike more traditional claims, long-tail claims can stretch back decades and involve thousands of litigants and many different carriers. Most legacy systems weren't designed to handle such a complex web of information. Insurers are under growing pressure to update these systems, and the Sarbanes-Oxley corporate governance legislation is adding to that pressure. "Many carriers are struggling to understand their exposure," says Mike Carson, claims program director of The Innovation Group (TiG), a Hartford, Connecticut-based insurance software specialist. "With SOX's stringent requirements as to what their reserving picture should look like, it's becoming imperative that they can do so."

Automating Long-Tail Claims Management

Ohio-based Nationwide Indemnity is ahead of the game in tackling the problem. As a third-party administrator, it manages commercial liability claims for other carriers, including Wausau Insurance. Nationwide manages the pre-1985 business of Wausau Insurance, but back in 2000, due to a switch of affiliation, it found that the system the book was running on was soon to be decommissioned.

The carrier's search for an alternative led it to TiG. The software specialist's solution matched Nationwide's needs more closely than those of others in the market, but it was still essentially a baseline claims system. Together the companies set to work turning it into a system for managing long-term exposure.

The first phase of the project, which went live in 2001, centered on data conversion and the development of an apportionment engine to handle reserves, payments, and recoveries across policy years and coverage by individual claimants. With the second phase, in 2003, came major enhancements, including a facility for handling bulk invoices. This means, for example, that loss payments and expenses can be apportioned back to the proper years of coverage, but only one check is issued for the overall settlement, or a single invoice is issued for services covering many claims and policy years.

Nationwide wanted a system that kept manual intervention to an absolute minimum. "We streamlined the process of setting up claims, so that you build the whole claims structure through a single question-and-answer dialogue," explains Carson. "Once you have completed the Q&A, you've created the claim, set up your reserves, and attached the appropriate law firms, then the apportionment rules are applied, not only to the claim level, but also to each individual claimant level. We've really automated the process to address the volume issue and reduce the chance for error.

"The architecture is also extremely solid. We can handle any mass tort scenario."

With the solution well established at Nationwide, TiG has joined forces with Sun Microsystems to market it commercially. The solution, known as TiG LTE, is available on Sun UltraSPARC servers, running the Solaris Operating System.

"Long-tail claims hit directly at profitability," says Paul Dolbec, worldwide manager for the insurance industry at Sun. "Insurers are having to increase their reserves, which goes right to the bottom line. Mass tort litigation can also quickly erode an insurer's precious store of goodwill.

"It is a critical industry problem that is global in nature. By partnering with The Innovation Group we can offer a low-cost, effective solution for a highly critical business issue."

Addressing the Problem Head-on

As the lawsuits continue, there is a real issue between primary carriers that have entered into cost-sharing agreements as to the accuracy of each carrier's share of the financial outlay. This also becomes important between primary and excess carriers in terms of being able to provide the financial details to prove that certain limits have been exhausted, and that excess layers are penetrated.

"Along with the volume issue, we put a lot of work into the limit-tracking capabilities, which are virtually real time," says Carson. "You know exactly when you have hit a limit, adjustors are notified, and if there are any payments, those are put on hold."

TiG LTE is also designed to help insurers address the issue of indirect costs. "Carriers often bring in actuarial consulting firms to help them do a ground-up exposure analysis," Carson continues. "That can cost from $2 million to $15 million a year, yet a big part of the exercise is data gathering, which is one of the strengths of our solution."

Asbestos was an issue that kept insurance executives awake at night in the 1980s. But, as Tillinghast points out, it's not likely that they would have predicted the spiraling volume of claims over the past three years.

Long-term exposure claims are an issue that can no longer be avoided. "More and more companies are starting to address the issue," says John Van Blaricum, head of global marketing at TiG. "They're feeling the pain not only of the high cost of settling these claims, but—with Sarbanes-Oxley continuing to make its presence felt—also the pain of having to maintain reserves and report accurately to the authorities."

If Sarbanes-Oxley does prompt carriers to upgrade, the upside is that the auditing tools built into solutions such as TiG LTE will help make them compliant as well.