The Hartford 2014 Annual Report Download - page 43

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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 bond. 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 Personal and Commercial Lines, 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”.
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. For further discussion of these discounted liabilities, see Note 11 - Reserves for Future Policy Benefits and Unpaid Losses and Loss
Adjustment Expenses of Notes to Consolidated Financial Statements.
As of December 31, 2014 and 2013, net U.S. 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 in effect at the time the claims are incurred and which can vary from the statutory discount rates set by regulators. Largely
offsetting/augmenting 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.
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.
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