Travelers 2006 Annual Report Download - page 130

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The $1.80 billion decline in gross claim and claim adjustment expense reserves in 2006 primarily
reflected payments related to prior year hurricanelosses, claim and claim adjustment expense payments
from runoff operations and favorable prior year reserve development, primarily in the Personal Insurance
segment, partially offset by the impact of reserves acquired in the RITC transaction described in note 1.
Asbestos and environmental reserves are included in the General liability, Commercial multi-peril
lines and International and other lines in the summary table. Asbestos and environmental reserves are
discussed separately; see “Asbestos Claims and Litigation”, “Environmental Claims and Litigation” and
“Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves”.
General Discussion
The process for estimating the liabilities for claim and claim expenses begins with the collection and
analysis of claim data. Data on individual reported claims, both current and historical, including paid
amounts and individual claim adjuster estimates, are grouped by common characteristics (“components”)
and evaluated by actuaries in their analyses of ultimate claim liabilities by product line. Such data is
occasionally supplemented with external data as available and when appropriate. The process of analyzing
reserves for a component is undertaken on a regular basis, generally quarterly, in light of continually
updated information.
Multiple estimation methods are available for the analysis of ultimate claim liabilities. Each
estimation method has its own set of assumption variables and its own advantages and disadvantages, with
no singleestimation method being better than the others in all situations and no one set of assumption
variables being meaningful for all product line components. The relative strengths and weaknesses of the
particular estimation methods when applied to a particular group of claims can also change over time.
Therefore, the actual choice of estimation method(s) can change with each evaluation. The estimation
method(s) chosen are those that are believed to produce the most reliable indication at that particular
evaluation date for the claim liabilities being evaluated.
In most cases, multiple estimation methods will be valid for the particular facts and circumstances of
the claim liabilities being evaluated. This will result in a range of reasonable estimates for any particular
claim liability. The Company uses such range analyses to back test whether previously established estimates
for reserves at the reporting segments are reasonable, given subsequent information. Reported values
found to be closer to the endpoints of a range of reasonable estimates are subject to further detailed
reviews. These reviews may substantiate the validity of management’s recorded estimate or lead to a
change in the reported estimate.
The exact boundary points of these ranges are more qualitative than quantitative in nature, as no clear
line of demarcation exists to determine when the set of underlying assumptions for an estimation method
switches from being reasonable tounreasonable. As a result, the Company does not believe that the
endpoints of these ranges are or would be comparable across companies. In addition, potential interactions
among the different estimation assumptions for different product lines make the aggregation of individual
ranges a highly judgmental and inexact process.
Property casualty insurance policies are either written on a claims made or on an occurrence basis.
Policies written on a claims made basis require that claims be reported during the policy period. Policies
that are written on an occurrence basis require that the insured demonstrate that a loss occurred in the
policy period, even if the insured reports the loss many years later.
Most general liability policies are written on an occurrence basis. These policies are subject to
substantial loss development over time as facts and circumstances change in the years following the policy
issuance. The use of the occurrence form accounts for much of the reserve development in asbestos and
environmental exposures, and it is also used to provide coverage for construction general liability,