The Hartford 2013 Annual Report Download - page 44

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Reserving Methodology
(See Reserving for Asbestos and Environmental Claims within Property & Casualty Other Operations for a discussion of how
A&E reserves are set)
How reserves are set
Reserves are set by line of business within the various segments. A single line of business may be written in more than one segment.
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. The Company’s shortest-tail lines of business are property and auto physical damage. The longest tail
lines of business include workers’ compensation, general liability, professional liability and assumed reinsurance. 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.
The Company’s 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. For most lines of business, these reserve reviews incorporate a variety of actuarial
methods and judgments and involve rigorous analysis. 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. Most reserves are reviewed fully each quarter, including loss and loss adjustment expense reserves for
property, auto physical damage, auto liability, package business, workers’ compensation, most general liability, professional liability and
fidelity and surety. Other reserves are reviewed semi-annually (twice per year) or annually. These include, but are not limited to, reserves
for losses incurred in accident years older than twelve and twenty years, for Consumer Markets and Property & Casualty Commercial,
respectively, assumed reinsurance, latent exposures, such as construction defects, and unallocated loss adjustment expense. For reserves
that are reviewed semi-annually or annually, management monitors the emergence of paid and reported losses in the intervening quarters
to either confirm that the estimate of ultimate losses should not change or, if necessary, perform a reserve review to determine whether
the reserve estimate should change.
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.
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”.
As of December 31, 2013 and 2012, net property and casualty insurance product reserves for losses and loss adjustment expenses
reported under accounting principles generally accepted in the United States of America (“U.S. GAAP”) were approximately equal to
net reserves reported on a statutory basis. Under U.S. GAAP, liabilities for unpaid losses for permanently disabled workers’
compensation claimants are discounted at rates that are no higher than risk-free interest rates and which generally exceed the statutory
discount rates set by regulators, such that workers’ compensation reserves for statutory reporting are higher than the net reserves for U.S.
GAAP reporting. Largely offsetting the effect of the difference in discounting is that a portion of the U.S. GAAP provision for
uncollectible reinsurance is not recognized under statutory accounting. Most of the Company’s property and casualty insurance product
reserves are not discounted. However, the Company has discounted liabilities funded through structured settlements and has discounted
certain reserves for indemnity payments due to permanently disabled claimants under workers’ compensation policies.
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.