Travelers 2005 Annual Report Download - page 23

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Specialty distributes its specialty products internationally through brokers int
he 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. 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 an expectation 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 profitable growth 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 proprietary
forms to tailor insurance coverage to insureds within the 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, 2005,
contractholder receivables and payables on unpaid losses associated with large deductible policies were
each approximately $281million. 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 amountof 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 coverage for directors’ and officers’ liability arising in their official capacities, employment
practices liability insurance, fiduciary liability for trustees and sponsors of pension, health and welfare, and
other employee benefit plans, errors and omissions insurance for employees, agents, professionals and
others arising from acts or failures to act under specified circumstances, as well as umbrella and excess
insurance. Errors and omissions insurance for professionals (such as lawyers, accountants, doctors and
other health care providers) is sometimes also known as professional liability insurance.
Fidelity and Surety provides fidelity insurance coverage, which protects an insured for loss due to
embezzlement or misappropriation of funds by an employee, and surety, which is a three-party agreement
whereby the insurer agrees to pay a third party or make complete an obligation in response to the default,
acts or omissions of an insured. Surety is generally provided for construction performance, legal matters
such as appeals, trustees in bankruptcy and probate and other performance bonds. This product line
includes surety business written in the Company’s following subsidiaries: St. Paul Guarantee (Canada),
Afianzadora Insurgentes (Mexico) and St. Paul Travelers Casualty and Surety Company of Europe
(United Kingdom).