The Hartford 2008 Annual Report Download - page 80

Table of Contents
Reserving for non-A&E reserves within Ongoing and Other Operations
How non-A&E reserves are set
Reserves are set by line of business within the various operating segments. As indicated in the above table, a single line of
business may be written in one or more of the segments. Case reserves are established by a claims handler on each
individual claim and are adjusted as new information becomes known during the course of handling the claim. Lines of
business for which loss data (e.g., paid losses and case reserves) emerge (i.e., is reported) over a long period of time are
referred to as long-tail lines of business. Lines of business for which loss data emerge more quickly are referred to as
short-tail lines of business. Within the Company’s Ongoing Operations, the shortest-tail lines of business are property and
auto physical damage. The longest tail lines of business within Ongoing Operations include workers’ compensation, general
liability, and professional liability. Assumed reinsurance, which is within Other Operations, is also long-tail business.
For short-tail lines of business, emergence of paid loss and case reserves is credible and likely indicative of ultimate losses.
For long-tail lines of business, emergence of paid losses and case reserves is less credible in the early periods and,
accordingly, may not be indicative of ultimate losses.
An expected loss ratio is used in initially recording the reserves for both short-tail and long-tail lines of business. This
expected loss ratio is determined through a review of prior accident years’ loss ratios and expected changes to earned
pricing, loss costs, mix of business, ceded reinsurance and other factors that are expected to impact the loss ratio for the
current accident year. For short-tail lines, IBNR for the current accident year is initially recorded as the product of the
expected loss ratio for the period, earned premium for the period and the proportion of losses expected to be reported in
future calendar periods for the current accident period. For long-tailed lines, IBNR reserves for the current accident year are
initially recorded as the product of the expected loss ratio for the period and the earned premium for the period, less reported
losses for the period.
Company reserving actuaries, who are independent of the business units, regularly review reserves for both current and prior
accident years using the most current claim data. These reserve reviews incorporate a variety of actuarial methods and
judgments and involve rigorous analysis. Most non-A&E reserves are reviewed fully each quarter, including loss reserves
for property, auto physical damage, auto liability, package business, workers’ compensation, most general liability,
professional liability and fidelity and surety. Other non-A&E reserves are reviewed semi-annually (twice per year) or
annually. These include, but are not limited to, reserves for losses incurred before 1988, allocated loss adjustment expenses,
assumed reinsurance, latent exposures such as construction defects, unallocated loss adjustment expense and all other
non-A&E exposures within Other Operations. For reserves that are reviewed semi-annually and annually, management
monitors the emergence of paid and reported losses in the intervening quarters to either confirm that its estimate of ultimate
losses should not change or, if necessary, perform a reserve review to determine whether the reserve estimate should change.
For most lines of business, a variety of actuarial methods are reviewed and the actuaries select methods and specific
assumptions appropriate for each line of business based on the current circumstances affecting that line of business. These
selections incorporate input, as judged by the reserving actuaries to be appropriate, from claims personnel, pricing actuaries
and operating management on reported loss cost trends and other factors that could affect the reserve estimates. The output
of the reserve reviews are reserve estimates that are referred to herein as the “actuarial indication”.
The actuarial techniques or methods used primarily include paid and reported loss development, frequency / severity,
expected loss ratio and Bornhuetter-Ferguson techniques. Within any one line of business, a variety of techniques are used.
Within any one line of business, certain methods are generally given more influence in determining the actuarial indication.
The methods that are given more influence vary within a line of business based primarily on the maturity of the accident
year, the mix of business and the particular internal and external influences impacting the claims experience or the methods.
The following is a discussion of the most common methods used; these methods are not used for every line of business or
every accident year within a line of business.
Paid Development method. Historical data, organized by accident period and calendar period, is used to develop paid loss
development patterns, which are then applied to current paid losses by accident period to estimate ultimate losses. The paid
development method is also used to estimate reserves for allocated loss adjustments expenses (“ALAE”).
Paid development techniques do not use information about case reserves and, therefore, are not affected by changes in case
reserving practices. Paid development techniques can, however, be significantly affected by changes in claim closure
patterns. Paid development techniques for longer-tailed lines are generally less useful for more recent accident years since a
low percentage of ultimate losses are paid to date in early periods of development and small changes in paid losses can have
a large impact on estimated ultimate losses.
Reported Development method. Historical data, organized by accident period and calendar period, is used to develop
reported loss development patterns, which are then applied to current reported losses by accident period to estimate ultimate
losses. The reported losses used in this analysis refer to cumulative paid losses plus case reserves and do not include IBNR.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009