In the course of this work we observed:

$6%(67265(/$7('',6($6(6 7+(,1685$1&(&267 SUHSDUHGE\ 7LP$QGUHZVDQG*HRII$WNLQV,QWURGXFWLRQ The ideas for this paper evolved out of studies we were asked to undertake by a number of insurers involving estimation of the cost of asbestos-related disease claims. In the course of this work we observed: considerable differences in reserving approach among insurers limited awareness of the potential for significant future costs to arise widespread confusion and uncertainty. We sought to develop a methodology for future projection which, while necessarily involving a number of approximations, was based on only a few key assumptions. The derivation of our estimates is described in this paper. To put the cost of asbestos-related disease claims into perspective; Australia s worst two catastrophes of recent times were Darwin s Cyclone Tracy and the Newcastle Earthquake. In current values these catastrophes are estimated to have generated insured losses of about $1 billion each. We will show that the cost to the insurance industry of claims arising from asbestos-related diseases may ultimately exceed the $1 billion mark. The cost to the whole community is of course much greater. By preparing this paper, we hope to provide a brief explanation of the background and issues relevant to asbestos-related disease claims and give a framework for financial analysis. Further work is clearly needed to refine and develop the modelling framework we have prepared. ASBESTOS-RELATED DISEASES THE INSURANCE COST 1

,QIRUPDWLRQ The following were the main sources of information used in development of this work: the claims experience of individual companies we have worked for (although none of this information is shown in this paper) various publicly available documents and papers, all of which are listed in the bibliography at the end of the paper interviews with personnel involved with various aspects of asbestos claims on a regular basis. 8QFHUWDLQW\ At this stage considerable uncertainty attaches to most of the elements of our projections. While the body of knowledge concerning asbestos diseases is increasing, much is still unknown, and in some cases unknowable, about: the degree and nature of the exposure to asbestos and asbestos products typically associated with the various asbestos diseases the population that is likely to have been so exposed the latency period of the diseases. From an insurance viewpoint, costs will also depend on future decisions by the courts and by governments which are impossible to predict. 6WUXFWXUHRI3DSHU The paper comprises four main sections in addition to the Introduction: Background - a brief introduction to asbestos compiled from various papers and articles, including a description of the types and uses of asbestos and the main asbestos-related diseases. Australia-wide Mesothelioma Liability - this section explains the derivation of our estimate of the Australia-wide compensation liabilities for mesothelioma cases (both public sector and private sector). Other Asbestos-related Diseases - provides estimates of compensation liabilities arising from asbestos-related diseases other than mesothelioma. Total Asbestos-related Liabilities and Allocation by Type of Insurer - this section combines our estimates of liability for each of the main types of disease and attempts to allocate the total cost among the major categories of insurer. ASBESTOS-RELATED DISEASES THE INSURANCE COST 2

%DFNJURXQG 7\SHVDQG8VHVRI$VEHVWRV Asbestos is a general name used to describe a large number of naturally occurring silicates that have grown in fibrous form. The three types of asbestos of major commercial importance in Australia are: Chrysotile - (white asbestos) Crocidolite - (blue asbestos) Amosite - (grey/brown asbestos). Chrysotile is a member of the serpentile (flexible, curly) group of minerals and crocidolite and amosite are amphiboles (straight, rigid). The crocidolite and amosite fibres tend to be much thicker than those of chrysotile, and are believed to present a higher risk as explained later. The desirable qualities of asbestos are its resistance to heat and chemicals, and its low cost. The main areas of use in the past have been as: a fire retardant: for insulation for frictional and wear properties (e.g. brakes/clutches) for reinforcement (e.g. asbestos cement) for acid and alkaline resistance (e.g. gaskets, batteries). While chrysotile accounts for over 90% of world-wide use of asbestos, with amosite being the next most popular form in a commercial sense, Australia is one of only two countries (the other being South Africa) to have mined crocidolite to a significant extent. 3HULRGRI$VEHVWRV([SRVXUH Australia has used asbestos since the 1900 s and was the highest per capita user in the world during the 1950 s (mainly of chrysotile). Australia was also a major producer of crocidolite between 1943 and 1966 through the Wittenoom mine in Western Australia. Usage remained high up until the 1960 s when crocidolite was phased out, followed by amosite in the 1970 s and chrysotile in the 1980 s. The only industries still in existence are for frictional products such as brakes and clutches where there is no viable substitute at this stage, and for asbestos gaskets (chrysotile only). The safety standards are much more stringent now than they were prior to the 1960 s and air concentration levels are currently ASBESTOS-RELATED DISEASES THE INSURANCE COST 3

less than.25 fibres per ml compared to between 5 and 50 fibres per ml in the 1930 s to 1960 s. 7\SHVRI$VEHVWRVUHODWHG'LVHDVHV The main asbestos-related diseases are: Mesothelioma - a severe cancer of the mesothelium (lining of the lungs or abdomen), invariably fatal and very rare except when exposed to asbestos; its onset most always occurs more than fifteen years after the initial exposure to asbestos, and usually much later. Asbestosis - scarring of the lung tissue, fatal in cases of heavy asbestos exposure but more usually disabling, the degree of which depends directly on the level of exposure; the latency period is shorter than for mesothelioma. Lung Cancer - a relatively common disease, closely related to smoking and also believed to be due to asbestos exposure; the latency period is long, although not as long as for mesothelioma. Asbestos also produces a number of benign conditions of the lung; among these is pleural plaques which, while not of itself disabling is nevertheless indicative of heavy asbestos exposure. Studies have shown that, due to the nature of the mineral fibres, mesothelioma is most commonly associated with crocidolite, less often with amosite and only rarely with chrysotile. Lung cancer is also believed to be more common with crocidolite and amosite than with chrysotile. 'RVHUHVSRQVH5HODWLRQVKLS Asbestos presents a health hazard in a dose-related manner - i.e. the higher the dose, the greater the effect. Exposure to asbestos (i.e. the dosage) is usually measured by combining the concentration of fibres in the air with the period of exposure. Thus exposure for two years at a concentration of 10 fibres per ml presents the same hazard as for four years at 5 fibres per ml. The dose-response relationship is believed to be linear, i.e. a 50% increase in dose also increases the risk by 50%. Asbestosis is believed to occur in any person heavily enough exposed. The severity of the illness depends only on the level of exposure. The condition will normally also continue to deteriorate over time. The same direct relationship between exposure and disease has not been established for either mesothelioma or lung cancer. It is not known what causes mesothelioma in one person and not another. ASBESTOS-RELATED DISEASES THE INSURANCE COST 4

$XVWUDOLD:LGH0HVRWKHOLRPD/LDELOLWLHV Mesothelioma is the most significant asbestos-related disease financially. It also happens to be that area where most published data is available. For these reasons, and also since the compensation issues are more clearly defined for mesothelioma than for either of the other major diseases, we have initially made estimates of the mesothelioma liabilities in isolation. Later sections consider the likely costs of lung cancer and asbestosis cases relative to the projected mesothelioma costs. $SSURDFK The estimate of the Australia-wide mesothelioma liabilities has been developed in stages as follows: Stage 1: Stage 2: Stage 3: Stage 4: Stage 5: Examine the number and characteristics of past mesothelioma cases. Estimate the number of future reported cases considering among other matters - any available authoritative projections - knowledge of the periods of heaviest exposure and the latency period of the disease. Estimate the proportion of mesothelioma cases that result in a claim for compensation. Estimate the average cost of each claim. Combine assumptions for the number of cases, the proportion of cases that result in a claim, and the average claim cost to derive an estimate of the overall liabilities. 6WDJH1XPEHURI$XVWUDOLDZLGH0HVRWKHOLRPD&DVHV3DVW The Australian Mesothelioma Register records cases of mesothelioma diagnosed since 1980. Between 1980 and 1985 additional data was collected on individual cases and compiled for the Australian Mesothelioma Surveillance Program (1979-1985) referred to as the "Surveillance Program". Various statistics from the Surveillance Program of significance to our study are given in Appendix A and are used at various stages throughout the remainder of the paper. The register relies on voluntary notifications from clinicians and pathologists as soon as a patient is suspected of having mesothelioma. Deaths from State cancer registries are used to cross-check the notifications. The initial diagnoses are confirmed by a specially appointed pathology panel - only a small proportion of cases (about 5%) appear to have been either assessed by the panel as not being mesothelioma or withdrawn by the doctor malting the initial notification. ASBESTOS-RELATED DISEASES THE INSURANCE COST 5

The number of cases notified by year are shown in the graph below: We believe that the dip in 1986 may be due in some way to the changeover from Surveillance Program to register. The total number of cases reported between 1981 and 1990 is 2,003 and is currently running at around 300 cases per annum. 6WDJH1XPEHURI$XVWUDOLDZLGH0HVRWKHOLRPD&DVHV)XWXUH As we noted earlier, mesothelioma has a long latency period. Once diagnosed, the disease is invariably fatal within one or two years. Results from the Surveillance Program indicate that the average time lag between the first exposure to asbestos and the diagnosis of mesothelioma is approximately thirty-seven years. Fewer than 6% of cases were diagnosed within twenty years of first exposure and fewer than 30% within thirty years. From Berry (1991) we know that the risk of dying from mesothelioma (averaged over all levels of exposure) has varied among Wittenoom workers up to thirty-five years from first exposure as follows: ASBESTOS-RELATED DISEASES THE INSURANCE COST 6

It is clear that some understanding of how the risk changes beyond year 35 is vital to projection of future cases. We are aware of studies which show that the risk stabilises, and perhaps reduces, beyond year 35. Other studies show no such effect. In each case however, the data is too scanty for reliable conclusions to be drawn. Berry (1991) prepared projections of future mesothelioma cases among Wittenoom workers on five different bases, all of which fitted the experience up to duration 35 years satisfactorily but which allowed for differing risk levels beyond that time. The abstract to his paper states: "Between the years 1987 and 2020 it is predicted that between 250 and 680 deaths will occur due to mesothelioma. This wide range is due to uncertainty on the functional form of the relation between mesothelioma rate and time, and insufficient data to estimate the elimination rate of crocidolite from the lungs. The most likely range is the lower half of this total range, that is between 250 and 500". The results from each of the projection bases used by Berry are summarised below from lowest to highest: Reported - 1981 to 1986 62 62 62 62 62 Projected - 1987 to 1990 40 44 44 48 49 102 106 106 110 111 Projected - 1991 to 2020 215 339 397 525 605 Ratio 2.1 3.2 3.7 4.8 5.5 ASBESTOS-RELATED DISEASES THE INSURANCE COST 7

Thus Berry s projections imply that the ratio of Wittenoom cases reported after 1990 to cases reported between 1981 and 1990 will be about 2 to 5 times, with around 3 to 3.5 times being more likely. We have used these ratios to derive corresponding numbers of future cases Australiawide, assuming that the pattern of reporting is similar to that for Wittenoom and allowing for the 2,003 cases reported to the Mesothelioma Register between 1981 and 1990. It can be noted that crocidolite was mined at Wittenoom between 1943 and 1966, which encompasses the period of greatest consumption of asbestos throughout Australia. The results are as follows Low - 4,000 Middle - 7,000 High - 9,000 While we have been unable to identify any documented projections of future Australiawide mesothelioma cases, Worksafe Australia recently predicted another 6,000 cases over the next twenty years (press release dated 25 February 1991). Considering that: the number of notifications is running at around 300 per annum, the average latency period between the date of first exposure and the date of contracting the disease is thought to be about thirty-five to forty years, the production of asbestos-based products continued well into the 1960 s, then it seems likely that the level of notifications will remain high for another ten years at least. As such the Worksafe prediction does not appear unreasonable. For this study we have adopted a range for future Australia-wide mesothelioma cases of 5,000 to 9,000. The major uncertainty at this stage appears to be if, and by how much, the risk of contracting mesothelioma rises beyond thirty-five years after first exposure. If it does continue to rise significantly, then a figure towards the higher end of this range may well be more appropriate. Otherwise the lower end of the adopted range (around 6,000) appears more likely. &RPSDULVRQZLWK863RSXODWLRQ3URMHFWLRQVIRU0HVRWKHOLRPD We have compared the projected Australia-wide cases given above with estimates contained in Nicholson et al s paper (1982) of asbestos-related deaths due to lung cancer and mesothelioma among US workers (which we refer to as "the US Study"). The US Study related only to occupational exposure between 1940 and 1979. The projections assumed that the risk of death from mesothelioma would continue to rise up ASBESTOS-RELATED DISEASES THE INSURANCE COST 8

to forty-five years from onset of exposure and would remain constant thereafter. This shape is similar to the second lowest basis used by Berry (1991) for the Wittenoom projections which produced 339 mesothelioma cases after 1991 (equivalent to about 6,000 Australia-wide cases) or about 3.2 times the number reported in 1981 to 1990. The following results taken from the US Study are comparable to our estimates for Australia 1. Projected cases (all industries) in 1990 to 2030 are 94,700 or about 4.5 times the number in 1980 to 1989. 2. Excluding shipping (which peaks earlier) the projected cases in 1990 to 2030 are 75,400 or about 5.6 times the number in 1980 to 1989. 3. For construction trades only, the projected cases in 1990 to 2030 are 34,200 or about 8.1 times the number in 1980 to 1989. The US Study thus suggests that the ratios used for our crude projections for Australia may be low. It is noteworthy also that trends over time can differ significantly for different industries due to the assumed timing of exposure in the past. 6WDJH1XPEHURI&RPSHQVDWLRQ&ODLPV It is difficult to ascertain what proportion of past Australia-wide mesothelioma cases have resulted in a claim for compensation. We have called this proportion the propensity to claim, equal to: Number of Compensation Claims ) Number of Mesothelioma Cases Part of the difficulty in calculating this ratio lies with the need to collate information from a wide range of third parties exposed to compensation claims as described below. 6RXUFHVRI&ODLP The most common type of claim would probably be against the worker s employer at the time of asbestos exposure, assuming that the exposure is occupational - i.e. a workers compensation claim. The Surveillance Program showed that the period of occupational exposure exceeded ten years in 50% of cases. Often therefore more than one employer would be involved. Sometimes the employers would be large government bodies (e.g. railways, navy, electricity boards), sometimes large companies (e.g. manufacturers of asbestos products such as James Hardie and CSR) and also small family businesses (e.g. plumbers, builders). More recently, it has been common for the asbestos manufacturer to be cited as a joint defendant with the employer in cases of occupational exposure outside the asbestos production industries. Other third parties may also be involved, e.g. the building contractor who specified the use of certain asbestos products, leading to an injury to a ASBESTOS-RELATED DISEASES THE INSURANCE COST 9

worker of the building company involved with that site. Such a claim might be shared among the employer, the contractor and the manufacturer of the asbestos product. From an insurance viewpoint, it is worth noting that claims against the manufacturer/contractor in these cases would be covered under public or products liability policies, and not employers liability policies. Public liability claims can sometimes also result from mesothelioma cases where there is no occupational exposure if the source of environmental exposure can be traced to a third party - e.g. the location of an asbestos factory next to the person s home. The way in which the liability of the various parties to any litigation is resolved depends on a number of factors. Central to these is the question of forseeability and state of knowledge, having regard to the role and size of the organisation concerned. At one extreme is the large company engaged in mining of asbestos and manufacture of asbestos based products on a large scale. At the other extreme is the small employer whose employees might have had casual exposure to asbestos dust at a time when it was not widely known that relatively modest exposure could cause mesothelioma. 'XVW'LVHDVHV%RDUG In view of the impossibility of obtaining information from all of these parties, we have estimated the propensity to claim solely from the experience of the Dust Diseases Board in New South Wales ("the Board"). The Board show the number of claims for compensation due to mesothelioma in their annual reports each year. This information has been available since 1980. The mesothelioma victims entitled to receive compensation from the Board are those due to occupational exposure in New South Wales excluding employees of the Commonwealth government. We have estimated the number of such cases using: information from the Australian Mesothelioma Register showing the number of cases diagnosed in New South Wales in each year Surveillance Program data showing the proportion of occupational cases in various industries. The Surveillance Program data indicates that nearly 70% of mesothelioma cases appear to be due to occupational exposure. The claims from occupational exposure arose in the following industries: ASBESTOS-RELATED DISEASES THE INSURANCE COST 10

Asbestos Production 26% Shipping 23% Building 13% Railways 9% Metal Fabrication 9% Power Stations 4% Other 16% 100% A significant proportion of shipping cases would be for Commonwealth employees. The majority of cases in each of the other categories would probably be for employees of private companies or State government departments. We have assumed that 20% of all occupational cases relate to Commonwealth employees (for more detail see Table 5). One measure of propensity to claim can therefore be estimated by combining: the number of known compensation claims recorded by the Board, and estimates of the number of potential victims entitled to compensation. This analysis is set out below - Table 1 - Dust Diseases Board Estimated Propensity to Claim Dust Diseases Total Potential Propensity Year of Board NSW Dust Disease to Diagnosis/Notification Claims Cases Claims* Claim 1982 13 98 55 24% 1983 21 58 32 66% 1984 24 84 47 51% 1985 32 80 45 71% 1986 20 52 29 69% 1987 23 58 32 40% 1988 32 67 38 84% 1989 44 131 73 60% 1990 48 128 72 67% Overall 257 756 423 61% * Equals total cases 0. 7 x (1-0. 2), (ie. excluding non-occupational cases and public sector cases) On this basis the propensity to claim appears to be about 50% to 70%. Also, since the Board provides statutory benefit payments only, workers seeking general damages against their employer need to claim separately. These common law claims are heard in the Dust Diseases Tribunal. We were not able to obtain any data showing the proportion of Board cases lodged with the Tribunal, although we believe it may be as low as 50% of the ASBESTOS-RELATED DISEASES THE INSURANCE COST 11

claims accepted by the Board. The common law claim frequency may therefore be only 25 % to 35 %. Ideally, we would select rates for the propensity to claim applicable to: both statutory benefit claims and common law claims claims for Commonwealth government employees, as well as employees of State government departments and private companies other States besides NSW. In view of the shortage of useful information for this purpose we have chosen, on a largely subjective basis, to use a single rate for past cases of 40%. There are likely to be a number of factors contributing to the low propensity to claim in the past, among them: lack of awareness by the worker difficulty in identifying the relevant employer(s) (in some cases the exposure may even have occurred overseas) or in proving negligence reluctance to litigate at a time when the worker is already subject to considerable distress general reluctance of the generation of workers exposed to asbestos to litigate (i.e. differing social attitudes). It is possible that the propensity to claim will increase over time as the rights of workers become more established and as the general awareness of those exposed increases. For example, we believe that the foreseeability issue associated with the need to show negligence on the part of the employer has generally been found in favour of the worker (not to say that cases in future will not be won by employers on foreseeability) and does not present such a major obstacle for future claimants. This is discussed further in Appendix B. For the remainder of this paper we have assumed a range of propensity to claim for future occupational cases of Low - 45% High - 60% The propensity to claim for cases from environmental exposure would be much lower due to difficulties in proving negligence. Considering the lack of any relevant data we have assumed a claim frequency of 5 % for both past and future environmental cases. ASBESTOS-RELATED DISEASES THE INSURANCE COST 12

6WDJH$YHUDJH&ODLP6L]H The average cost of mesothelioma claims is difficult to determine. The heads of damage which typically apply to court awards would include: general damages economic loss (both past and future) medical expenses (including palliative care costs). We believe that the benchmark for general damages is probably between $50,000 and $100,000 in most States. Court awards tend to be slightly higher than out of court settlements. Note that where the worker is deceased then the Compensation of Relatives Act and Wrongs Act apply in New South Wales and Victoria respectively (other States have similar legislation). In these cases the payments for general damages to the worker s estate tend to be relatively small. The level of the award for economic loss is largely dependent on the age of the worker when the illness is diagnosed. Most workers would probably be beyond the normal retirement age consistent with an average latency period for the disease of around thirtyfive to forty years. The economic loss component would be nil or small for the majority of these cases. The latency period can however be as short as twenty years for a small proportion of claims. In fact, the Surveillance Program showed that 25% of occupational exposures were diagnosed when the worker was aged 55 or less and another 32% were for workers aged 55 to 64. In such cases the average loss of future working life might be as much as ten years, suggesting an average economic loss award for these cases of perhaps $150,000 or $200,000. Note that the Compensation of Relatives Act (or equivalent) requires there be economic dependence for a claim to be made. Considering all of the above, we expect that the average economic loss payment across all claims is probably around $50,000. Once diagnosed, the survival period of injured workers is short (rarely more than three years). Little can be done to prolong life or to curtail the spread of the disease. Each of these factors limits the medical expenses typically incurred. The benchmark for medical costs may be about $40,000. On the basis of the above rough figures, the overall average claim size would appear to be about $150,000 to $200,000, allowing for say $10,000 to $20,000 for other heads of damage (e.g. loss of expectations of life). This range is consistent with the settlement experience shown by various insurers data that we have been able to examine. For the remainder of the paper we have adopted an average cost per mesothelioma claim of $150,000. ASBESTOS-RELATED DISEASES THE INSURANCE COST 13

6WDJH$XVWUDOLDZLGH0HVRWKHOLRPD/LDELOLWLHV&DOFXODWLRQ The Australia-wide mesothelioma liabilities can be calculated from the assumptions set out in the preceding sections as follows: Table 2 - Australia-wide Mesothelioma Liabilities Future Past Low High 1. Number of Cases 2,000 5,000 9,000 2. Number of Occupational Claims Proportion due to occupational exposure Propensity to claim for occupational cases 70% 70% 70% 40% 45% 60% Number of occupational claims 560 1,575 3,780 3. Number of Environmental Claims Proportion due to environmental exposure Propensity to claim for environmental exposure 30% 30% 30% 5% 5% 5% Number of environmental claims 30 75 135 4. Average Claim Size $150,000 $150,000 $150,000 5. Liabilities ($m) Occupational 84 236 567 Environmental 5 11 20 Total 89 247 587 These estimates are neither inflated nor discounted. As such, they represent the total costs which would be incurred if all claims (both past and future) were settled in current dollars. ASBESTOS-RELATED DISEASES THE INSURANCE COST 14

2WKHU$VEHVWRV5HODWHG'LVHDVHV /XQJ&DQFHU The following comparisons of financial significance can be made between lung cancer and mesothelioma. 1XPEHURI&DVHV The number of new certificates of disablement issued by the Dust Diseases Board for mesothelioma and lung cancer are - Table 3 - Dust Diseases Board - Certificates of Disablement Mesothelioma Lung Cancer Ratio 1982 13 5 38% 1983 21 7 33% 1984 24 7 29% 1985 32 6 19% 1986 20 6 30% 1987 23 7 30% 1988 32 8 25% 1989 44 9 20% 1990 48 2 4% Total 257 57 22% We believe that the Dust Diseases Board only accept asbestos-related lung cancers where there is some scarring of the lung. This position is consistent with recent studies which suggest there is no excess lung cancer among workers without radiographically detectable lung fibrosis. In the past we believe that some organisations have been prepared to settle out of court without scarring of the lung having been proven. In future, however, it seems likely that the Dust Diseases Board practice will become more common, leading perhaps to relatively fewer claims in future. To the end of 1986 there had been 141 cases of lung cancer among former workers of Wittenoom compared to 94 cases of mesothelioma. Not all of these lung cancer cases would have been due to asbestos exposure. Berry (1991) predicts 340 to 465 future deaths due to lung cancer; 45 % of these cases are assumed to be due to asbestos exposure - say 150 to 210 cases or between 30% and 60% of the number of predicted mesothelioma cases. ASBESTOS-RELATED DISEASES THE INSURANCE COST 15

/DWHQF\ The latency period for lung cancer is believed to be shorter than for mesothelioma. de Klerk et al (1989) noted that the lung cancer incidence rate among Wittenoom workers increased more than linearly over time, but less than quadratically. Mesothelioma, on the other hand, was observed to increase between the third and fourth power from time of first exposure. Nicholson et al (1982) observed a linear increase in excess lung cancers among insulation workmen. A shorter latency period for lung cancer than for mesothelioma would mean, all thing being equal, that lung cancer cases in future will represent a smaller proportion of mesothelioma cases than they have done so far. $YHUDJH&ODLP6L]H We believe that the average claim size tends to be similar for asbestos-related lung cancer and mesothelioma. /XQJ&DQFHU&RQFOXVLRQ After considering all of the evidence presented above we have assumed that both past and future asbestos-related lung cancer claims will cost 25% of mesothelioma claims, i.e. assuming a similar average claim size to mesothelioma, but a frequency which is lower. $VEHVWRVLV The following features are relevant to the likely ultimate cost of asbestosis claims relative to those for mesothelioma. 1XPEHURI&DVHV The number of new certificates of disablement issued by the Dust Diseases Board since 1980 for each of mesothelioma and asbestosis is shown below: ASBESTOS-RELATED DISEASES THE INSURANCE COST 16

Year Mesothelioma Certificates Asbestosis Certificates 1981 13 45 1982 13 17 1983 21 26 1984 24 20 1985 32 23 103 131 1986 20 17 1987 23 27 1988 32 29 1989 44 34 1990 48 31 167 138 We also know from Berry s paper (1991) that up to 1986 there had been 356 successful compensation claims for asbestosis among Wittenoom workers compared to only 94 cases of mesothelioma. /DWHQF\3HULRG The latency period is much shorter for asbestosis than for mesothelioma. This is reflected in the lower increase in new certificates issued by the Dust Diseases Board during the 1980 s relative to mesothelioma. Also, of the 356 asbestosis claims among Wittenoom workers, only 100 were successful in the period 1981 to 1986, i.e. most of the claims were reported prior to 1981. The reducing asbestosis frequency is also illustrated by Berry s (1991) projections of mesothelioma and asbestosis among Wittenoom workers (using the middle projection basis): Mesothelioma Asbestosis Ratio Actual to 1986 94 356 4.0:1 Projected 1987 to 2020* 441 200 0.5:1 * Middle Basis $YHUDJH&ODLP6L]H The average cost of asbestosis claims tends to be much lower than for mesothelioma due to the lesser severity of the disease. We understand that the benchmark for general damages is probably $30,000 to $50,000. While asbestosis can be a crippling disease, and in some cases fatal, the worker may often be able to remain in employment in some reduced capacity and as a result, economic loss payments, on average, are probably lower ASBESTOS-RELATED DISEASES THE INSURANCE COST 17

than for mesothelioma. From the various data we have seen we expect that the average asbestosis claim might be in the range $30,000 to $50,000 compared to say $150,000 to $200,000 for mesothelioma. $VEHVWRVLV&RQFOXVLRQ After considering all of the above evidence we have adopted assumptions for the cost of asbestosis claims relative to mesothelioma claims of: Past Cases - 75% Future Cases - 25% The ratio for past cases is mathematically equivalent to assuming three times as many claims at around one quarter the cost, on average. Similarly the ratio for future cases is equivalent to the same number of claims as for mesothelioma but at one quarter the cost, on average. ASBESTOS-RELATED DISEASES THE INSURANCE COST 18

7RWDO$VEHVWRV5HODWHG/LDELOLWLHVDQG$OORFDWLRQE\7\SHRI,QVXUHU 7RWDO/LDELOLWLHV The Australia-wide liabilities for all asbestos-related diseases are estimated to be: Table 4 - Total Liabilities Future Past Low High $m $m $m Mesothelioma 89 247 587 Lung Cancer 22 62 147 Asbestosis 67 62 147 Total 178 371 881 As noted earlier, these estimates assume claims are settled in current dollars - i.e. no adjustments have been made for inflation or for discounting. The total liabilities, past and future, are thus estimated to be $0.55 billion to $1.06 billion. It is worth re-iterating at this point the comments made in the introduction concerning uncertainty, as the difficulties in deriving the valuation assumptions can be too easily forgotten. We still have much to learn about the asbestos-related diseases themselves and about future interpretations by the courts affecting these cases. Indeed, it is quite possible that the total liabilities may lie outside the range given (either above or below). $OORFDWLRQE\7\SHRI,QVXUHU The total liabilities will be shared among: Commonwealth government employers (e.g. Navy) State government employers (e.g. transport authorities) Private companies involved with the mining, manufacturing and use of asbestos and asbestos products Insurance companies through workers compensation and public/products liability policies Reinsurance companies ASBESTOS-RELATED DISEASES THE INSURANCE COST 19

Specific bodies set up to meet these claims (e.g. Dust Diseases Board in New South Wales, Industrial Diseases Fund in Western Australia) Accident Compensation Schemes. Many factors will affect the distribution of liabilities among these parties including: court decisions affecting the way in which the liabilities of various third parties are determined the extent to which workers compensation and public liability risks were self insured by government departments and private companies alike the nature of reinsurance purchased by the direct insuring companies legislation affecting asbestos funds and the liability of accident compensation schemes. As a consequence of all of these factors it is extremely difficult to sub-divide the liabilities by type of insurer and only a very broad allocation has been attempted here. The Surveillance Program showed that occupational cases of mesothelioma arose from the following industries - Asbestos Production/Manufacture 26% Shipping 23% Buildings 13% Railways 9% Metal Fabrication 9% Power Stations 4% Other 16% Based on our general knowledge of the types of industries within each sector, supported in some cases by data compiled by the ABS, we expect that the allocation between Commonwealth Government, State Government and Private Companies is probably close to: ASBESTOS-RELATED DISEASES THE INSURANCE COST 20

Industry Table 5 - Allocation by Sector Commonwealth Government State Government Private Companies Total Asbestos - - 26% 26% Shipping 18% - 5% 23% Building - 2% 11% 13% Railways - 9%* - 9% Metal Fabrication - - 9% 9% Power Stations - 4% - 4% Other 2% 2% 12% 16% 20% 17% 63% 100% * Includes Australian National which is now within the Commonwealth s domain. We also expect that most, if not all, of the liability of both Commonwealth and State Governments would have been self-insured. We have assumed that these employers represent about 20% and 17% respectively of the overall liability. We have no idea what proportion of the liability of private companies would be insured, although it is likely to be significant. All companies would have had employers liability cover (although with low upper limits in some States) and most would have had public and products liability cover (again with limits which in some cases are now inadequate). Probably 70% (or more) of the liability would have been insured. Sometimes, however, companies may have difficulty identifying their insurer even where they were insured. Most of that assumed by insurers would probably stay with the direct insurer. Reinsurers may receive some from quota share arrangements however these are unlikely to be significant for the workers compensation and public/products liability classes. We would not expect significant recoveries from excess of loss contracts, mainly because the spreading of individual claims over treaty years will, in most cases, mean that the excess point would not be reached. Indexation clauses, where in existence, would also limit potential recoveries. In some cases, individual claims may be aggregated and called one claim for reinsurance purposes, particularly for products liability (e.g. all claims in one year from one particular product). More significant reinsurance recoveries may emerge from such situations. We are unsure how common this will be. The Dust Diseases Board in New South Wales and the Industrial Diseases Fund in Western Australia would also meet some of the liability of private companies, although each of these bodies provide statutory benefits only. Considering the number of claims ASBESTOS-RELATED DISEASES THE INSURANCE COST 21

occurring in both of these States, and assuming also that statutory benefits represent on average around 30% of the overall claims costs, we have estimated that these bodies will meet around 15 % of the liability of private companies. The Accident Compensation Schemes established in Victoria, New South Wales and South Australia are unlikely to have a significant liability as few, if any, claims should emerge from exposure in the 1980 s. Taking together all of the above, we expect that the total liabilities (past and future) would be shared among insurers as follows Table 6 - Share of Total Liabilities by Type of Insurer Range % % Commonwealth Government 15-20 State Government 15-20 Private Companies 10-15 Dust Diseases Board and Industrial Diseases Fund 10-15 Direct Insurers 30-40 Reinsurers 5-10 Total 85-120 ASBESTOS-RELATED DISEASES THE INSURANCE COST 22

$FNQRZOHGJHPHQWV We would particularly like to thank Michael Salter of Phillips Fox Solicitors for his assistance in explaining to us some of the complex legal issues. All opinions and conclusions arrived at are however entirely our own. We would also like to acknowledge the assistance of Suzanne Ross for a typically dedicated and professional production effort. ASBESTOS-RELATED DISEASES THE INSURANCE COST 23

$33(1',;$ 7KH$XVWUDOLDQ0HVRWKHOLRPD6XUYHLOODQFH3URJUDP 'DWD The following statistics are available from the Surveillance Program for mesothelioma cases notified between May 1981 and December 1985. $FFXUDF\RI1RWLILFDWLRQV Of the 903 notifications to the Surveillance Program, 32 were withdrawn on later advice from the notifier that the initial diagnosis of mesothelioma was incorrect (approximately 4% of all cases). Of the remaining cases, 355 had been examined by the Pathology Panel for a definitive diagnosis with the following results: Definite Mesothelioma 68% Probable Mesothelioma 21% Possible Mesothelioma 7% Insufficient Data 1% Not Mesothelioma 3% 100% These data indicate that only about 6% of all mesothelioma cases notified to the program/register are definitely not mesothelioma (i.e. 3% withdrawn plus 3% not mesothelioma), although the rate of mis-classification may possibly be as high as say 10% to 15%. 6RXUFHRI([SRVXUH Examination of the source of occupational exposure was completed for 726 cases with the following results: Definite Occupational Exposure 45% Probable Occupational Exposure 7% Possible Occupational Exposure 11% Domestic Exposure 2% Proximity to Asbestos-cement Factory* 3% Wittenoom Resident 1% No Known Exposure 26% Insufficient Information 5% 100% * Or similar identifiable indirect exposure ASBESTOS-RELATED DISEASES THE INSURANCE COST 24

Thus, about 66% of the cases for which information was available appeared to relate to occupational exposure. The following proportions were obtained from the 456 cases of occupational exposure (including those classified as possible): Year of first Exposure Pre 1930 9% 1930 to 1950 53% 1950+ 36% Unknown 2% 100% Length of Exposure Less than 1 year 8% 1 year to 5 years 19% 6 years to 10 years 15% 11 years+ 52% Unknown 6% 100% Age at Diagnosis To 54 24% 55 to 64 32% 64+ 44% 100% Time-tag between First Exposure and Diagnosis 0 to 20 years 5% 20 to 29 years 20% 30 to 39 years 32% 40+ years 41% Unknown 2% 100% Average 37 years ASBESTOS-RELATED DISEASES THE INSURANCE COST 25

Industry Asbestos Production/Manufacture 26% Shipping 23% Building 13% Railways 9% Metal Fabrication 9% Power Stations 4% Other 16% 100% Occupation Labourer 17% Carpenter 12% Boilermaker 10% Fitter/Turner 9% Lagger/Insulator 6% Other 46% 100% ASBESTOS-RELATED DISEASES THE INSURANCE COST 26

$33(1',;% 7KH)RUHVHHDELOLW\,VVXH For a common law action to be successful, it is necessary for the plaintiff to show that the employer failed to take reasonable care to avoid a foreseeable risk of injury. The following dates are relevant to the foreseeability issue: 1930: Merewether and Price paper documented the link between scarring of the lung (asbestosis) and asbestos exposure. 1955: Richard Doll s paper in 1955 confirmed an increased incidence of lung cancer among asbestos workers. 1960: Wagner s paper made the association with mesothelioma. Superficially, it would appear difficult to prove negligence in cases of mesothelioma arising wholly from exposure prior to the 1960 s (which probably accounts for more than one-half of all cases). In practice, however, the defendant has still often been found liable even if the particular injury which eventuated could not have been foreseen, as long as the class of injury was foreseeable. Asbestosis and mesothelioma have been shown to be of a similar class (Barrow -v- CSR). On this basis the plaintiff can try to argue that the risk of injury was foreseeable even where exposure was prior to 1960. Even so, some cases are still being won by employers on the foreseeability issue. Much probably depends on the size and industry of the employer. For example, fringe asbestos users (e.g. electrical and plumbing companies) and small employers are probably more likely to succeed as defendants than larger employers involved with the primary production or usage of asbestos products. ASBESTOS-RELATED DISEASES THE INSURANCE COST 27

%LEOLRJUDSK\ Ashley, D.A. The Wittenoom Judgements - Law Institute Journal - December 1988 Berry, G. de Klerk, N.H.; Armstrong,B.; Musk, A.W.; Hobbs, M.S.T Dell, R.; Peto, J. Ferguson, D.A. et al Hughes, J.M.; Weill, H. James, L. et al Nicholson, W.J.; Perkel, G. and Selikoff, I.J. Wagner, Joe. Wagner, J.C.; Sleggs, C.A.; Marchand, P. Prediction of Mesothelioma, Lung Cancer and Asbestosis in Former Wittenoom Asbestos Workers - Br Journal Ind Med - 1991 Prediction of Future Cases of Asbestos-related disease among Former Miners and Millers of Crocidolite in Western Australia - Med Journal of Aust - December 1989 Effects on Health of Exposure to Asbestos - HMSO 1983 The Australian Mesothelioma Surveillance Program 1979 to 1985 - Med Journal of Aust - August 1987 Asbestosis as a precursor of Asbestos-related Lung Cancer Results of a Prospective Mortality Study - Br Journal Ind Med -1991 Relationship between Lung Asbestos Fibre Type and Concentration and Relative Risk of Mesothelioma Cancer 67 - April 1991 Occupational Exposure to Asbestos : Population at Risk Projected Mortality 1980-2030 - Americal Journal of Ind Med -1982 The Discovery of the Association between Blue Asbestos and Mesothelioma and the Aftermath - Br Journal Ind Med - 1991 Diffuse Pleural Mesothelioma and Asbestos Exposure in the North Western Cape Province - Br Journal Ind Med - 1960 ASBESTOS-RELATED DISEASES THE INSURANCE COST 28

Worksafe Australia Asbestos Symposium Handling Asbestos Safely - Minimising the Risk Today May 1991. Contents Ferguson, D.F. Overview of Asbestos-related Diseases Berry, G. Risk at Different Levels of Exposure Leigh. J. The Australian Mesothelioma Program and Register: Recent Results Rogers, A.J. Detection and Monitoring of Asbestos and Guidelines for its Safe Removal from Buildings Rogers, A.J. Asbestos Mineralogy. Properties and Industries Francis, E. Government Approaches and Role in Asbestos Control Today Leigh, J. et al Lung Asbestos Fiber Context and Mesothelioma Cell Type, Site and Survival Rogers, A.J. et al Relationship between Lung Asbestos Fiber Type and Concentration and Relative Risk of Mesothelioma. A Case Control Study Driscoll, T. et al Asbestos and Non-asbestos Exposures is the Aetiology of Malignant Mesothelioma in Australia : A Case Control Study Bakes, G. et al Clinical Features of Mesothelioma Associated with Tumour Cell History Worksafe Australia National Institute Report The Incidence of Mesothelioma in Australia 1986 to 1988 Australian Mesothelioma Register ASBESTOS-RELATED DISEASES THE INSURANCE COST 29