Disclosure Requirements for Mass Torts

The Securities and Exchange Commission (SEC) and state insurance departments have added increased disclosure requirements for companies with environmental and asbestos (E&A) exposures. The first section of the paper reviews the new disclosure requirements for insurance companies and outlines benchmark ratios which rating agencies and regulators will use to measure E&A reserve adequacy. Specifically, we provide a benchmark analysis based on the newly published Note 24 information for several primary companies and reinsures. We also outline the differences in ratios for environmental and asbestos and for primary companies versus reinsures. However, it should be kept in mind that simple analyses of ratios will have several shortcomings which we discuss. The next section describes the general methods which rating agencies use to measure an insurance company’s E&A reserve adequacy. Also, limitations with the standard ratio analysis and the need to factor in additional items are discussed. Trends are extrapolated to the future and likely future reserve additions are projected. The last section of the paper outlines the disclosure requirements for non-insurers. We also sample a number of 10K’s to observe trends in disclosures. Specifically, we compare various statistics for different time periods: the percentage of companies which disclose an accrual amount; the percentage of companies which discount their liabilities; etc. Keywords: Pollution, Financial Reporting