The Hartford 2008 Annual Report Download - page 84

Table of Contents
Workers’ Compensation. Workers’ compensation is the Company’s single largest reserve line of business and management
does the largest amount of actuarial analysis on this line of business. Methods performed include paid and reported
development, variations on expected loss ratio methods, and an in-depth analysis on the largest states. Paid development
patterns are historically very stable in the Company’s workers’ compensation business, so paid techniques are preferred for
older accident periods. For more recent periods, paid techniques are less predictive of the ultimate liability since such a low
percentage of ultimate losses are paid in early periods of development. Accordingly, for more recent accident periods, the
Company generally relies more heavily on a state-by-state analysis and the expected loss ratio approach.
Professional Liability. Reported and paid loss developments patterns for this line tend to be volatile. Therefore, the
Company typically relies on frequency and severity techniques.
Assumed Reinsurance and All Other within Other Operations. For these lines, management tends to rely on the reported
development techniques. In assumed reinsurance, assumptions are influenced by information gained from claim and
underwriting audits.
Allocated Loss Adjustment Expenses (ALAE). For some lines of business (e.g., professional liability and assumed
reinsurance), ALAE and losses are analyzed together. For most lines of business, however, ALAE is analyzed separately,
using paid development techniques and an analysis of the relationship between ALAE and loss payments.
Unallocated Loss Adjustment Expense (ULAE). ULAE is analyzed separately from loss and ALAE. For most lines of
business, incurred ULAE costs to be paid in the future are projected based on an expected cost per claim year and the
anticipated claim closure pattern and the ratio of paid ULAE to paid loss.
The final step in the reserve review process involves a comprehensive review by senior reserving actuaries who apply their
judgment and, in concert with senior management, determine the appropriate level of reserves based on the various
information that has been accumulated. Numerous factors are considered in this determination process including, but not
limited to, the assessed reliability of key loss trends and assumptions that may be significantly influencing the current
actuarial indications, the maturity of the accident year, pertinent trends observed over the recent past, the level of volatility
within a particular line of business, and the improvement or deterioration of actuarial indications in the current period as
compared to the prior periods. In general, changes are made more quickly to more mature accident years and less volatile
lines of business. Total recorded net reserves, excluding asbestos and environmental, were higher than the actuarial
indication of the reserves by 3.8% as of December 31, 2008 compared to 2.9% as of December 31, 2007.
During 2008, there were numerous changes to non-A&E reserve estimates. Among other loss developments in 2008, these
changes included a $156 release of reserves for workers’ compensation claims, primarily related to accident years 2000 to
2007, a $105 release of general liability claims, primarily related to accident years 2001 to 2007, and a $75 release of
reserves for professional liability claims related to accident years 2003 through 2006. See “Reserves” within the Property &
Casualty MD&A for further discussion of reserve developments.
Current trends contributing to reserve uncertainty
The Hartford is a multi-line company in the property and casualty business. The Hartford is therefore subject to reserve
uncertainty stemming from a number of conditions, including but not limited to those noted above, any of which could be
material at any point in time for any segment. Certain issues may become more or less important over time as conditions
change. As various market conditions develop, management must assess whether those conditions constitute a long-term
trend that should result in a reserving action (i.e., increasing or decreasing the reserve).
Within the commercial segments and the Other Operations segment, the Company has exposure to claims asserted for bodily
injury as a result of long-term or continuous exposure to harmful products or substances. Examples include, but are not
limited to, pharmaceutical products, silica and lead paint. The Company also has exposure to claims from construction
defects, where property damage or bodily injury from negligent construction is alleged. The Company also has exposure to
claims asserted against religious institutions and other organizations relating to molestation or abuse. Such exposures may
involve potentially long latency periods and may implicate coverage in multiple policy periods. These factors make reserves
for such claims more uncertain than other bodily injury or property damage claims. With regard to these exposures, the
Company is monitoring trends in litigation, the external environment, the similarities to other mass torts and the potential
impact on the Company’s reserves.
In Personal Lines, reserving estimates are generally less variable than for the Company’s other property and casualty
segments. This is largely due to the coverages having relatively shorter periods of loss emergence. Estimates, however, can
still vary due to a number of factors, including interpretations of frequency and severity trends and their impact on recorded
reserve levels. Severity trends can be impacted by changes in internal claim handling and case reserving practices in addition
to changes in the external environment. These changes in claim practices increase the uncertainty in the interpretation of
case reserve data, which increases the uncertainty in recorded reserve levels. In addition, the introduction of new products
has lead to a different mix of business by type of insured than the Company experienced in the past. Beginning in 2004, the
Company introduced its Dimensions auto and homeowners product for Agency business and beginning in 2007, the
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009