The Hartford 2009 Annual Report Download - page 41

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In addition to the expected loss ratio, the actuarial techniques or methods used primarily include paid and reported loss development and
frequency / severity techniques as well as the Bornhuetter-Ferguson method (a combination of the expected loss ratio and paid
development or reported development method). Within any one line of business, the methods that are given more influence vary 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 output of the reserve reviews are reserve estimates that are referred to herein as the “actuarial
indication”.
Provided below is a general discussion of which methods are preferred by line of business. Because the actuarial estimates are
generated at a much finer level of detail than line of business (e.g., by distribution channel, coverage, accident period), this description
should not be assumed to apply to each coverage and accident year within a line of business. Also, as circumstances change, the
methods that are given more influence will change.
Property and Auto Physical Damage. These lines are fast-developing and paid and reported development techniques are used as these
methods use historical data to develop paid and reported loss development patterns, which are then applied to current paid and reported
losses by accident period to estimate ultimate losses. The Company relies primarily on reported development techniques although a
review of frequency and severity and the initial loss expectation based on the expected loss ratio is used for the most immature accident
months. The advantage of frequency / severity techniques is that frequency estimates are generally easier to predict and external
information can be used to supplement internal data in making severity estimates.
Auto Liability – Personal Lines. For auto liability, and bodily injury in particular, the Company performs a greater number of
techniques than it does for property and auto physical damage. In addition, because the paid development technique is affected by
changes in claim closure patterns and the reported development method is affected by changes in case reserving practices, the Company
uses Berquist-Sherman techniques which adjust these patterns to reflect current settlement rates and case reserving techniques. The
Company generally uses the reported development method for older accident years as a higher percentage of ultimate losses are
reflected in reported losses than in cumulative paid losses and the frequency/severity and Berquist-Sherman methods for more recent
accident years. Recent periods are influenced by changes in case reserve practices and changing disposal rates; the frequency/severity
techniques are not affected as much by these changes and the Berquist-Sherman techniques specifically adjust for these changes.
Auto Liability – Commercial Lines and Short-Tailed General Liability. As with Personal Lines auto liability, the Company performs a
variety of techniques, including the paid and reported development methods and frequency / severity techniques. For older, more
mature accident years, management finds that reported development techniques are best. For more recent accident years, management
typically prefers frequency / severity techniques that make separate assumptions about loss activity above and below a selected capping
level.
Long-Tailed General Liability, Fidelity and Surety and Large Deductible Workers’ Compensation. For these long-tailed lines of
business, the Company generally relies on the expected loss ratio and reported development techniques. Management generally weights
these techniques together, relying more heavily on the expected loss ratio method at early ages of development and more on the reported
development method as an accident year matures.
Workers’ Compensation. Workers’ compensation is the Company’ s single largest reserve line of business so a wide range of methods
are reviewed in the reserve analysis. 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 information that has been
accumulated. Numerous factors are considered in this 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. Total recorded net reserves excluding asbestos and environmental
were 3.8% higher than the actuarial indication of the reserves as of December 31, 2009 and December 31, 2008.
See the Reserve Development Section for a discussion of changes to reserve estimates recorded in 2009.