The Hartford 2008 Annual Report Download - page 88

Table of Contents
Similar to general liability, assumed casualty reinsurance is affected by reported loss development pattern assumptions. In
addition to the items identified above that would affect both direct and reinsurance liability claim development patterns,
there is also an impact to assumed reporting patterns for any changes in claim notification from ceding companies to the
reinsurer. Recorded net reserves for HartRe assumed reinsurance business, excluding asbestos and environmental liabilities,
within Other Operations were $562 as of December 31, 2008. If the reported loss development patterns underlying the
Company’s net reserves for HartRe assumed casualty reinsurance change by 10%, the estimated net reserve need would
change by $245, in either direction. A 10% change in reported loss development patterns is within historical variation, as
measured by the variation around the average development factors as reported in statutory accident year reports.
Reserving for Asbestos and Environmental Claims within Other Operations
How A&E reserves are set
The Company continues to receive asbestos and environmental claims. Asbestos claims relate primarily to bodily injuries
asserted by people who came in contact with asbestos or products containing asbestos. Environmental claims relate
primarily to pollution and related clean-up costs.
The Company wrote several different categories of insurance contracts that may cover asbestos and environmental claims.
First, the Company wrote primary policies providing the first layer of coverage in an insured’s liability program. Second, the
Company wrote excess policies providing higher layers of coverage for losses that exhaust the limits of underlying
coverage. Third, the Company acted as a reinsurer assuming a portion of those risks assumed by other insurers writing
primary, excess and reinsurance coverages. Fourth, subsidiaries of the Company participated in the London Market, writing
both direct insurance and assumed reinsurance business.
In establishing reserves for asbestos claims, the Company evaluates its insureds’ estimated liabilities for such claims using a
ground-up approach. The Company considers a variety of factors, including the jurisdictions where underlying claims have
been brought, past, pending and anticipated future claim activity, disease mix, past settlement values of similar claims,
dismissal rates, allocated loss adjustment expense, and potential bankruptcy impact.
Similarly, a ground-up exposure review approach is used to establish environmental reserves. The Company’s evaluation of
its insureds’ estimated liabilities for environmental claims involves consideration of several factors, including historical
values of similar claims, the number of sites involved, the insureds’ alleged activities at each site, the alleged environmental
damage at each site, the respective shares of liability of potentially responsible parties at each site, the appropriateness and
cost of remediation at each site, the nature of governmental enforcement activities at each site, and potential bankruptcy
impact.
Having evaluated its insureds’ probable liabilities for asbestos and/or environmental claims, the Company then evaluates its
insureds’ insurance coverage programs for such claims. The Company considers its insureds’ total available insurance
coverage, including the coverage issued by the Company. The Company also considers relevant judicial interpretations of
policy language and applicable coverage defenses or determinations, if any.
Evaluation of both the insureds’ estimated liabilities and the Company’s exposure to the insureds depends heavily on an
analysis of the relevant legal issues and litigation environment. This analysis is conducted by the Company’s lawyers and is
subject to applicable privileges.
For both asbestos and environmental reserves, the Company also compares its historical direct net loss and expense paid and
reported experience, and net loss and expense paid and reported experience year by year, to assess any emerging trends,
fluctuations or characteristics suggested by the aggregate paid and reported activity.
Once the gross ultimate exposure for indemnity and allocated loss adjustment expense is determined for its insureds by each
policy year, the Company calculates its ceded reinsurance projection based on any applicable facultative and treaty
reinsurance and the Company’s experience with reinsurance collections.
Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves
With regard to both environmental and particularly asbestos claims, significant uncertainty limits the ability of insurers and
reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses. Traditional actuarial reserving
techniques cannot reasonably estimate the ultimate cost of these claims, particularly during periods where theories of law are
in flux. The degree of variability of reserve estimates for these exposures is significantly greater than for other more
traditional exposures. In particular, the Company believes there is a high degree of uncertainty inherent in the estimation of
asbestos loss reserves.
In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate
loss development patterns, plaintiffs’ expanding theories of liability, the risks inherent in major litigation, and inconsistent
emerging legal doctrines. Furthermore, over time, insurers, including the Company, have experienced significant changes in
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009