Travelers 2004 Annual Report Download - page 22

Principal Markets and Methods of Distribution
Specialty distributes the majority of its specialty commercial products through the same base of
approximately 6,200 independent agencies and brokers that distribute the Commercial segment’s products. These
brokers and independent agencies are located throughout the United States and are serviced by three customer
service centers. In recent years, Specialty has made significant investments in enhanced technology utilizing
internet-based applications to provide real-time interface capabilities with its independent agencies and brokers.
Specialty builds relationships with well-established, independent insurance agencies and brokers. In selecting
new independent agencies and brokers to distribute its products, Specialty considers each agency’s or broker’s
profitability, financial stability, staff experience and strategic fit with its operating and marketing plans. Once an
agency or broker is appointed, Specialty carefully monitors its performance.
Specialty also distributes property and casualty products through selected wholesalers using surplus lines
paper, both on a brokerage and managing general underwriting basis. Wholesalers are used because they serve
certain markets that are not typically served by our appointed retail agents. The wholesale surplus lines market
allows for more flexibility to write certain classes of business due to the absence of rate and form regulation for
surplus lines business. In working with wholesalers on a brokerage basis, Specialty underwrites the business and
sets the premium level. In working with wholesalers on a managing general underwriting (MGU) basis, the
MGUs produce and underwrite business that conforms to Specialty’s underwriting guidelines that have been
specifically designed for each facility.
Specialty distributes its specialty products internationally through brokers in the domestic markets of each
of the three countries in which it operates, the United Kingdom, Canada and the Republic of Ireland. Specialty
also writes business at Lloyd’s, where its products are distributed through Lloyd’s accredited brokers and, by
virtue of Lloyd’s worldwide licenses, Specialty has access to international markets across the world.
Pricing and Underwriting
Pricing levels for Specialty property and casualty insurance products are generally developed based upon
the frequency and severity of estimated losses, the expenses of producing business and managing claims, and a
reasonable allowance for profit. Specialty has a disciplined approach to underwriting and risk management that
emphasizes profit orientation rather than premium volume or market share.
Specialty has developed an underwriting and pricing methodology that incorporates dedicated underwriting,
claims, engineering, actuarial and product development disciplines for particular industries. This approach is
designed to maintain high quality underwriting and pricing discipline, based on an in-depth knowledge of the
specific industry. The underwriters and engineers use proprietary data gathered and analyzed over many years to
assess and evaluate risks prior to quotation, and then use the more than 4,000 proprietary forms to tailor
insurance coverage to target markets. This methodology enables Specialty to streamline its risk selection process
and develop pricing parameters that will not compromise its underwriting integrity.
A portion of Specialty business is written with large deductible insurance policies. Under some workers’
compensation insurance contracts with deductible features, Specialty is obligated to pay the claimant the full
amount of the claim. Specialty is subsequently reimbursed by the contractholder for the deductible amount and is
subject to credit risk until such reimbursement is made. At December 31, 2004, contractholder receivables and
payables on unpaid losses associated with large deductible policies were each approximately $1.41 billion.
Significant collateral, primarily letters of credit and, to a lesser extent surety bonds and cash collateral, is
generally requested for large deductible plans that provide for deferred collection of deductibles. The amount of
collateral requested is predicated upon the creditworthiness of the customer and the nature of the insured risks.
Specialty continually monitors the credit exposure and the adequacy of collateral.
Product Lines
General Liability provides coverage for liability exposures including bodily injury and property damage
arising from products sold and general business operations. Specialized liability policies may also include
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