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July 28, 2004

Don't forget to carry the one . . . billion

As you well know actuaries are known for their cunning ability to predict future costs. At times it is almost eerie how accurate they can be. But what happens when there is a little miscalculation . . . or a lot!

Well that questions will soon be answered by James Hardie and Trowbridge Consulting Ltd. Trowbridge Consulting Ltd. came up with a $294 million dollar estimate four years ago for the future cost of claims related to asbestos. It would be a vast understatement to say they were off. One might even speculate that their calculations were done with a TI-84 (batteries not included) and a magic 8-ball in the other hand. Of course we all turn to the almighty 8-ball on occasion, however when it results in a $2 billion dollar miscalculation, people tend to ask questions.
James Hardie now would like to propose a cap on future claims and are asking shareholders to foot the bill for future claims. As it turns out, there are plenty of lawyers that love to pounce on any mesothelioma patient and reward them (and themselves) with a piece of the asbestos pie. KPMG's actuaries have rendered their services as an expert witness to John Sheahan to prove the negligent claims that "fell below appropriate professional standards in concluding that events and claims had leveled in March 2000."
As the actuary/doctors well know, asbestos can take up to 50 years to affect a person. That leaves a little room for error in the future unlike typical reserves set for basic casualty estimates. James Hardie and Trowbridge Consulting Ltd's miscalculations included understated average claim size and an optimistic zero, yes zero percent inflation rate. Trowbridge denies wrongdoing and believes that it acted appropriately on the data it was given and that its calculations were "reasonable."

Posted by Tom Troceen


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