Travelers 2006 Annual Report Download - page 132

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faced with material uncertainty. Different actuaries may choose different assumptions when faced with
such uncertainty, based on their individual backgrounds, professional experiences and areas of focus.
Hence, the estimate selected by the various actuaries may differ materially from each other.
Lastly, significant structural changes to the available data, product mix or organization can also
materially impact the reserve estimation process. The merger of TPC and SPC resulted in the exposure of
each other’s actuaries and claim departments to different products, data histories, analysis methodologies,
claim settlement experts, and more robust data when viewed on a combined basis. This impacted the range
of estimates produced by the Company’s actuaries, as they reacted to new data, approaches, and sources of
expertise to draw upon. It also resulted inadditional levels of uncertainty, as past trends (that were a
function of past products, past claim handling procedures,past claim departments, and past legal and other
experts) may not repeat themselves, as those items affecting the trends change or evolve due to the merger.
This also increased the potential for materialvariation in estimates, as experts can have differing views as
to the impact of thesefrequently evolutionary changes. Events such as mergers increase the inherent
uncertainty of reserve estimates for a period of time, until stable trends reestablish themselves within the
new organization.
Risk factors
The major causes of material uncertainty (“risk factors”) generally will vary for each product line, as
well as for each separately analyzed component of the product line. In a few cases, such risk factors are
explicit assumptions of the estimation method and in most cases, they are implicit. For example, a method
may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume
that the legal interpretation of existing contract language will remain unchanged. Actual results will likely
vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is
different from that being estimated currently.
Some risk factors will affect more than one product line. Examples include changes in claim
department practices, changes in settlement patterns, regulatory and legislative actions, court actions,
timeliness of claim reporting, state mix of claimants, and degree of claimant fraud. The extent of the
impact of a risk factor will also vary by components within a product line. Individual risk factors are also
subject to interactions with other risk factors within product line components.
The effect of a particular risk factor on estimates of claim liabilities cannot be isolated in most cases.
For example, estimates of potential claim settlements may be impacted by the risk associated with
potential court rulings, but the final settlement agreement typically does not delineate how much of the
settled amount is due to this and other factors.
The evaluation of data is also subject to distortion from extreme events or structural shifts, sometimes
in unanticipated ways. For example, the timing of claims payments in one geographic region will be
impacted if claim adjusters are temporarily reassigned from that region to help settle catastrophe claims in
another region.
While some changes in the claim environment are sudden innature (such as a new court ruling
affecting the interpretation of all contracts in that jurisdiction), othersare more evolutionary. Evolutionary
changes can occur when multiple factors affect final claim values, with the uncertainty surrounding each
factor being resolved separately, in step-wise fashion. The final impact is not known until all steps have
occurred.
Sudden changes generally cause a one-time shift in claim liability estimates, although there may be
some lag in reliable quantification of their impact. Evolutionary changes generally cause a series of shifts in
claim liability estimates, as each component of the evolutionary change becomes evident and estimable.