Travelers 2004 Annual Report Download - page 26

business is largely dependent on promptly identifying and rectifying disparities between premium levels and
projected claim costs, and obtaining approval from state regulatory authorities when necessary for filed rate
changes.
Pricing in the homeowners business is also driven by changes in the frequency of claims and by inflation in
the cost of building supplies, labor and household possessions. Most homeowners policies offer, but do not
require, automatic increases in coverage to reflect growth in replacement costs and property values. In addition to
the normal risks associated with any multiple peril coverage, the profitability and pricing of homeowners
insurance is affected by the incidence of natural disasters, particularly hurricanes, winter storms, wind and hail,
water damage, earthquakes and tornadoes. In order to reduce the Company’s exposure to catastrophe losses,
Personal has limited the writing of new homeowners business and selectively non-renewed existing homeowners
business in some markets. In addition, underwriting standards have been tightened, price increases have been
implemented in some catastrophe-prone areas, and deductibles have been put in place in hurricane and wind and
hail prone areas. Personal uses computer-modeling techniques to assess its level of exposure to loss in hurricane
and earthquake catastrophe-prone areas. Changes to methods of marketing and underwriting in some jurisdictions
are subject to state-imposed restrictions, which can make it more difficult for an insurer to significantly reduce
catastrophe exposures.
Insurers writing personal lines property casualty policies may be unable to increase prices until some time
after the costs associated with coverage have increased, primarily because of state insurance rate regulation. The
pace at which an insurer can change rates in response to increased costs depends, in part, on whether the
applicable state law requires prior approval of rate increases or notification to the regulator either before or after
a rate change is imposed. In states with prior approval laws, rates must be approved by the regulator before being
used by the insurer. In states having “file-and-use” laws, the insurer must file rate changes with the regulator, but
does not need to wait for approval before using the new rates. A “use-and-file” law requires an insurer to file
rates within a period of time after the insurer begins using the new rate. Approximately one-half of the states
require prior approval of most rate changes.
Independent agents either submit applications to the Company’s service centers for underwriting review,
quote, and issuance or they utilize one of its automated quote and issue systems. Automated transactions are
edited by the Company’s systems and issued if they conform to established guidelines. Exceptions are reviewed
by underwriters in the Company’s business centers or by agency managers. Audits are conducted by business
center underwriters and agency managers, on a systematic sampling basis, across all of the Company’s
independent agency generated business. Each agent is assigned to a specific employee or team of employees
responsible for working with the agent on business plan development, marketing, and overall growth and
profitability. The Company uses agency level management information to analyze and understand results and to
identify problems and opportunities.
The Personal products sold through additional marketing channels are underwritten by the Company’s
employees. Underwriters work with the Company management on business plan development, marketing, and
overall growth and profitability. Channel-specific production and claim information is used to analyze results and
identify problems and opportunities.
Product Lines
The primary coverages in Personal are personal automobile and homeowners insurance sold to individuals.
Personal had approximately 6.1 million policies in force at December 31, 2004.
Personal Automobile provides coverage for liability to others for both bodily injury and property damage
and for physical damage to an insured’s own vehicle from collision and various other perils. In addition, many
states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.
Homeowners and Other provides protection against losses to dwellings and contents from a wide variety
of perils, as well as coverage for liability arising from ownership or occupancy. The Company writes
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