The Hartford 2009 Annual Report Download - page 42

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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. In addition, the Company 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 because
of 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 led to a different mix of business by type of insured than the Company
experienced in the past. Such changes in mix increase the uncertainty of the reserve projections, since historical data and reporting
patterns may not be applicable to the new business.
In both Small Commercial and Middle Market, workers’ compensation is the Company’ s single biggest line of business and the line of
business with the longest pattern of loss emergence. Reserve estimates for workers’ compensation are particularly sensitive to changes
in medical inflation, the changing use of medical care procedures and changes in state legislative and regulatory environments. Medical
costs make up more than 50% of workers’ compensation payments and it is possible that federal health care reform will impact medical
payments in workers’ compensation. These changes increase the uncertainty in the application of development patterns. In addition,
over the past several accident years, the Company has experienced favorable claim frequency on workers’ compensation claims. The
Company’ s reserve estimates assume that reported losses for recent accident years will continue to emerge favorably and that severity
will not be adversely impacted by the lower volume of reported claims.
In the Specialty Commercial segment, many lines of insurance are “long-tail”, including large deductible workers’ compensation
insurance, as such, reserve estimates for these lines are more difficult to determine than reserve estimates for shorter-tail lines of
insurance. Estimating required reserve levels for large deductible workers’ compensation insurance is further complicated by the
uncertainty of whether losses that are attributable to the deductible amount will be paid by the insured; if such losses are not paid by the
insured due to financial difficulties, the Company would be contractually liable. Another example of reserve variability relates to
reserves for directors’ and officers’ insurance. There is potential volatility in the required level of reserves due to the continued
uncertainty regarding the number and severity of class action suits, including uncertainty regarding the Company’ s exposure to losses
arising from the collapse of the sub-prime mortgage market. Additionally, the Company’ s exposure to losses under directors’ and
officers’ insurance policies is primarily in excess layers, making estimates of loss more complex. The recent financial market turmoil
has increased the number of shareholder class action lawsuits against our insureds or their directors and officers and this trend could
continue for some period of time.
Impact of changes in key assumptions on reserve volatility
As stated above, the Company’ s practice is to estimate reserves using a variety of methods, assumptions and data elements. Within its
reserve estimation process for reserves other than asbestos and environmental, the Company does not consistently use statistical loss
distributions or confidence levels around its reserve estimate and, as a result, does not disclose reserve ranges.
The reserve estimation process includes assumptions about a number of factors in the internal and external environment. Across most
lines of business, the most important assumptions are future loss development factors applied to paid or reported losses to date. The
trend in loss costs is also a key assumption, particularly in the most recent accident years, where loss development factors are less
credible.
The following discussion includes disclosure of possible variation from current estimates of loss reserves due to a change in certain key
indicators of potential losses. Each of the impacts described below is estimated individually, without consideration for any correlation
among key indicators or among lines of business. Therefore, it would be inappropriate to take each of the amounts described below and
add them together in an attempt to estimate volatility for the Company’ s reserves in total. The estimated variation in reserves due to
changes in key indicators is a reasonable estimate of possible variation that may occur in the future, likely over a period of several
calendar years. It is important to note that the variation discussed is not meant to be a worst-case scenario, and therefore, it is possible
that future variation may be more than the amounts discussed below.