Who Insures The Insurers?
Just when the tidal wave seemed about ready to recede, a new tsunami has appeared on the horizon.
The "tidal wave" is the huge number of asbestos lawsuits that have been filed since the infamous "Sumner Simpson Papers" were discovered in 1977. These filings have begun to taper off in recent years, but now, major players in the insurance industry have issued warnings that asbestos litigation is about to take off once again.
There are a couple of dynamics at work, here. Part of it is the fact that an increasing number of asbestos lawsuits are being filed against what are known as "peripheral insureds." In the past, asbestos plaintiffs filed suit against the large asbestos producers – W.R. Grace, Johns-Manville, Raybestos and other corporate megaliths that provided the raw material to other industries. As the big players have been able to dodge their liability through creative uses of the nation's bankruptcy laws however (which favors Big Business and the wealthy over average working people), plaintiffs have increasingly gone after the companies and contractors that worked with asbestos materials and may or may not have been aware of the exposure hazards.
These companies in turn often wind up suing their insurance companies – and in some cases involving multiple insurers, these insurance companies wind up suing each other.
It's understandable, since there are potentially billions of dollars at stake. Bracing themselves for another wave of asbestos lawsuits, these insurance companies are adding to their cash reserves in anticipation of massive settlements. One prominent billionaire however is looking at this as an opportunity to increase his massive wealth even more – despite the fact that he's taking a huge risk.
Warren Buffet, who is the CEO of insurance conglomerate Berkshire-Hathaway, has been quoted as saying: "I can go into an emergency room and write life insurance if you let me charge enough of a premium." A few months ago, Buffet's company assumed asbestos liability for AIG and can Financial, to the tune of almost $4 billion. Berkshire-Hathaway is in essence, insuring these companies for their potential asbestos liability incurred after 1 January of 2011.
This is called "reinsurance;" basically, insuring the insurer against catastrophic loss. And while Buffet and his company could absorb these costs, in a worst-case scenario, it would be painful. Buffet however thinks long-term, and is (as a financial industry blogger put it), willing to be "greedy when others are fearful." There is also the factor of "float," meaning that while these funds are not being used to cover losses, they can be invested and returns made on those investments.
There is of course no crystal ball, and it is impossible to predict the future of asbestos litigation – particularly now that asbestos diseases are easier to diagnose at earlier stages, and some judges will not allow an asbestos suit to go forward unless there is documented evidence (such as medical tests) that the plaintiff is actually suffering from an asbestos disease or injury.
Armistead, Tom. "Insurance: Is Buffet Right About Asbestos Liability?" Seeking Alpha (http://seekingalpha.com/article/283496-insurance-is-buffett-right-about-asbestos-liability). Retrieved 1 August 2011.
Berkowitz, Ben. P/C Insurers Still Saddled With Asbestos Reserve Challenges." Claims Journal, 2 August 2011.
N/A. Update 4- Berkshire Takes On can Asbestos Risk." Reuters, 15 July 2011.
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