Perfluoroalkyl and polyfluoroalkyl substances (PFAS) are everywhere in the news lately.

PFAS refers to a class of chemicals renowned for resisting heat, water and stains—substances that are found in everything from upholstery to nonstick pans to raincoats. Unfortunately, due to their indestructible nature, they tend to endure in drinking water and human bloodstreams, earning them the nickname “forever chemicals” because they don’t break down in nature.

Certain PFAS chemicals in varying doses have been correlated with adverse health effects and, though the science remains unsettled, a growing body of peer-reviewed research has prompted a steady increase in lawsuits that have grown exponentially in recent years.

While insurance coverage issues related to PFAS claims are far from settled, some casualty actuaries have characterized this looming risk to insurance companies as “the next asbestos.” Still, many insurers have taken a reactive rather than proactive approach, and setting aside reserves to address PFAS claims is far from commonplace.

Although estimating PFAS risk is challenging, and traditional actuarial methods will not be applicable, newer and more innovative methodologies can help insurers set reasonable reserves so they will be well-positioned financially for this potential liability.

How Big Is the PFAS Risk to Insurers?

PFAS were first used commercially in the mid-20th century by 3M and DuPont, but they drew little scientific interest until 2000, when 3M told the U.S. Environmental Protection Agency (EPA) that it would phase out these chemicals after in-house research found the substances lingered in the environment. Since then, more than 10,000 peer-reviewed scientific studies have investigated the link between PFAS exposure and human health; more than 1,500 articles were published in 2023 alone.

With this rise in awareness has come a rise in litigation. The first lawsuit alleging harm from PFAS exposure was filed in West Virginia in 1999 and settled for an undisclosed amount. In the years since, Praedicat’s mass tort litigation tracker has recorded:

• More than 10,000 PFAS complaints
• 418 companies named across 152 industries
• $17 billion in settlements negotiated

Total PFAS-related settlement amounts are expected to substantially grow as new claims emerge almost daily. Even the known settlements could increase as municipalities have the option to opt out of two of the largest settlements, which represent $13.7 billion alone.

Policies Potentially at Risk

PFAS claims can potentially implicate several types of insurance coverage: general liability, pollution legal liability, first-party property, and even directors and officers liability coverage. While most policies today are likely to contain a total PFAS exclusion, such PFAS-specific exclusions did not exist in all earlier policy periods. This means that PFAS coverage arguments could hinge on the application of pollution exclusions and other policy wordings that likely could lead to coverage disputes. Indeed, there is a body of case law developing on this and other coverage issues with the outcomes largely dependent on the specific policy wording and which state’s law is being applied.

Timing can also complicate the situation. Because PFAS-related property damage and bodily injury exposure can occur over a long period, any policy in effect from the time of first PFAS damage to the time the lawsuit is filed could potentially be implicated, depending on the policy wording and applicable law, such as how a state applies a coverage trigger.

Moreover, what constitutes PFAS damage to property or persons is also far from settled. PFAS claims are new and developing and, unlike in the asbestos context, the point when bodily injury or property damage first occurs is sharply contested. Indeed, one federal court recently recognized that a person’s mere exposure to PFAS chemicals numbered in the thousands of different compounds, with each compound having a different half-life. The court also noted that, for most if not all Americans, interaction with materials containing PFAS is a fact of daily life. (In re: E. I. du Pont de Nemours & Co. C-8 Personal Injury Litigation, 87 F.4th 315, 6th Cir. November 27, 2023) Despite this near-universal exposure, not every person is sick or injured.

In cases where injury is established, these questions could implicate both occurrence-based and claims-made coverage, with the former resulting in decades-old policies responding to recently reported claims. There is currently a developing body of case law that involves various PFAS coverage issues, with the outcome of the small number of cases varying from no-coverage determinations to obligations of certain policies to defend the claims. These coverage determinations are guided by the specific policy wording at issue and the jurisdiction involved.

For these reasons, it often is imperative for insurers to analyze the available policy limits and potential coverage scenarios directly at the insured account level, considering everything that is known about the ongoing coverage litigation and jurisdictional precedent. While this can be arduous, it is important to at least consider doing for the largest accounts with significant liabilities, as the outcome of uncertain coverage disputes can lead to material variances in the reserve estimates produced.

Traditional Actuarial Methods Don’t Work for PFAS reserves

Although the potential PFAS risk to insurers is uncertain, estimating liabilities may be daunting. Traditional actuarial reserving approaches, such as chain ladder and Bornhuetter-Ferguson, do not provide an effective framework. Nor do many methodologies tailored for asbestos, pollution, and health hazard risks.

For starters, many traditional methods require historical claims experience to be representative of future expected claims. But with only a handful of PFAS insurance losses reported to date, the scarcity of relevant historical data makes it difficult to derive essential method assumptions.

In addition, traditional methodologies generally aggregate claims into time periods such as accident year or policy year in order to group claims that are likely to experience similar future development. But it is difficult to cleanly aggregate PFAS by accident year because the damages, as we’ve mentioned, often accumulate over a broad window of time instead of a particular date.

Finally, alleged injuries and damages culminating from PFAS exposure can take years to manifest, causing significant lags between the date of injury or damage and the date of report. Long periods of litigation could also extend the time lag between the date of report and the date of closure.

Stochastic Modeling Can Be Effective

In contrast, PFAS reserving is a natural fit for stochastic modeling, given the uncertainty surrounding scientific and regulatory developments, the manner in which specific companies employ PFAS in their businesses, how courts and juries evaluate scientific and economic evidence, and how insurance policies written many years ago will respond to claims. And it is now feasible to develop comprehensive inventories of PFAS exposures at the company level using structured and unstructured publicly available data and to interrogate the scientific literature at scale to develop a rigorous assessment of relative risk among those exposures.

An abundance of computing power enables actuaries to run millions of simulations to fully explore the wide set of future PFAS litigation outcomes and generate central and tail estimates of account-level and portfolio-level incurred but not reported (IBNR) claims. Developing a systematic understanding of PFAS exposures in this way can facilitate setting more accurate bulk IBNR reserves and assist with identifying accounts where buybacks or commutations would better fit the carrier’s long-term risk appetite.

For most insured accounts, coverage litigation is not strictly focused on one particular policy provision; instead, there are multiple policy provisions that could, depending on the facts, affect the coverage analysis. This uncertainty lends itself nicely to probabilistic reserving approaches to provide a range of potential liability outcomes. Having the flexibility to employ a range of assumptions in the reserving model provides insight into the true uncertainty of the estimates, which allows a company to book reserves at the appropriate confidence level. As more information becomes available on scientific findings, remediation techniques, settlements, and coverage litigation, the model assumptions can be continually updated to improve the estimate and the resulting confidence level.

Start Now So PFAS Uncertainty Doesn’t Last Forever

While much is still unknown about PFAS and how they will impact insurance liabilities, the evidence suggests there is enough information available to develop strategies on how to estimate reserves.

Deriving reserves for a novel risk is not a novel concept. For decades, actuaries have developed and adapted methodologies to meet the challenges posed by emerging exposures, and the capabilities of these methodologies continue to improve and evolve as more data becomes available. These approaches, paired with insights from external experts, can be used to develop reasonable estimates for potential PFAS liabilities today.

For more details on actuarial methodology and recent settlement amounts, visit milliman.com/PFAS-insurance-risk.