Travelers 2003 Annual Report Download - page 29

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Travelers has developed an underwriting and pricing methodology that incorporates underwriting, claims, engineering,
actuarial and product development disciplines for particular industries. This approach is designed to maintain high
quality underwriting and pricing discipline. It utilizes proprietary data gathered and analyzed by Travelers with
respect to its Commercial Lines business over many years. The underwriters and engineers use this information to
assess and evaluate risks prior to quotation. This information provides specialized knowledge about specific industry
segments. This methodology enables Travelers to streamline its risk selection process and develop pricing parameters
that will not compromise Travelers underwriting integrity.
For smaller businesses, Select Accounts uses a process based on Standard Industrial Classification codes to allow
agents and field underwriting representatives to make underwriting and pricing decisions within predetermined
classifications, because underwriting criteria and pricing tend to be more standardized for these smaller exposures.
A significant portion of Commercial Lines business is written with large deductible insurance policies. Under some
workers’ compensation insurance contracts with deductible features, Travelers is obligated to pay the claimant the full
amount of the claim. Travelers is subsequently reimbursed by the contractholder for the deductible amount, and is
subject to credit risk until such reimbursement is made. At December 31, 2003, contractholder receivables and
payables on unpaid losses associated with large deductible policies were each approximately $3.121 billion.
Retrospectively rated policies are also used for workers’ compensation coverage. Although the retrospectively rated
feature of the policy substantially reduces insurance risk for Travelers, it does introduce credit risk to Travelers.
Receivables on unpaid losses from holders of retrospectively rated policies totaled approximately $254.2 million at
December 31, 2003. Significant collateral, primarily letters of credit and, to a lesser extent surety bonds and cash
collateral, is generally requested for large deductible plans and/or retrospectively rated policies that provide for
deferred collection of deductibles and/or ultimate premiums. The amount of collateral requested is predicated upon the
creditworthiness of the customer and the nature of the insured risks. Commercial Lines continually monitors the credit
exposure on individual accounts and the adequacy of collateral.
Travelers continually monitors its exposure to natural and manmade peril catastrophic losses and attempts to mitigate
such exposure. Travelers uses sophisticated computer modeling techniques to analyze underwriting risks of business in
hurricane-prone, earthquake-prone and target risk areas. Travelers relies upon this analysis to make underwriting
decisions designed to manage its exposure on catastrophe-exposed business.