Travelers 2004 Annual Report Download - page 109

the specific coverage provided, the jurisdiction and specific policy provisions such as self-insured retentions.
There are numerous components underlying the general liability product line. Some of these have relatively
moderate payment patterns (with most of the claims for a given accident year closed within 5 to 7 years), while
others can have extreme lags in both reporting and payment of claims (e.g., a reporting lag of a decade for
“construction defect” claims).
While the majority of general liability coverages are written on an “occurrence basis,” certain general
liability coverages (such as those covering directors and officers or professional liability) are typically insured on
a “claims-made” basis.
General liability reserves are generally analyzed as two components: primary and excess/umbrella, with the
primary component generally analyzed separately for bodily injury and property damage. Bodily injury liability
payments reimburse the claimant for damages pertaining to physical injury as a result of the policyholder’s legal
obligation arising from non-intentional acts such as negligence, subject to the insurance policy provisions. In
some cases the damages can include future wage loss (which is a function of future earnings power and wage
inflation) and future medical treatment costs. Property damage liability payments result from damages to the
claimant’s private property arising from the policyholder’s legal obligation for non-intentional acts. In most
cases, property damage losses are a function of costs as of the loss date, or soon thereafter. In addition, sizable or
unique exposures are reviewed separately, such as asbestos, environmental, other mass torts, construction defect,
medical malpractice and large unique accounts that would otherwise distort the analysis. These unique categories
often require a very high degree of judgment and require reserve analyses that do not rely on traditional actuarial
methods.
Defense costs are also a part of the insured costs covered by liability policies and can be significant,
sometimes greater than the cost of the actual paid claims. For some products this risk is mitigated by policy
language such that the insured portion of defense costs erodes the amount of policy limit available to pay the
claim. Such “defense within the limits” policies are most common for “claims made” products. When defense
costs are outside of the limits, amounts paid do not erode the policy limits.
This line is typically the largest source of reserve estimate uncertainty in the United States (excluding
assumed reinsurance contracts covering the same risk). Major contributors to this reserve estimate uncertainty
include the reporting lag (i.e. the length of time between the event triggering coverage and the actual reporting of
the claim), the number of parties involved in the underlying tort action, whether the “event” triggering coverage
is confined to only one time period or is spread over multiple time periods, the potential dollars involved (in the
individual claim actions), whether such claims were reasonably foreseeable and intended to be covered at the
time the contracts were written (i.e., coverage dispute potential), and the potential for mass claim actions. Claims
with longer reporting lags result in greater inherent risk. This is especially true for alleged claims with a latency
feature, particularly where courts have ruled that coverage is spread over multiple policy years, hence involving
multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the potential
dollars involved and the underlying settlement complexity). Claims with long latencies also increase the potential
recognition lag, i.e., the lag between writing a type of policy in a certain market and the recognition that such
policies have potential mass tort and/or latent claim exposure.
The amount of reserve estimate uncertainty also varies significantly by component for the General Liability
product line. The components in this product line with the longest latency, longest reporting lags, largest
potential dollars involved, and greatest claim settlement complexity are Asbestos and Environmental.
Components that include latency, reporting lag and/or complexity issues, but to a materially lesser extent than
Asbestos and Environmental, include construction defect, medical malpractice, and other mass tort actions, such
as those related to silicone implants. Many components of General Liability are not subject to material latency or
claim complexity risks and hence have materially less uncertainty than the previously mentioned components. In
general, policies providing coverage with shorter reporting lags, fewer parties involved in settlement
negotiations, only one policy potentially triggered per claim, fewer potential settlement dollars, reasonably
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