Travelers 2006 Annual Report Download - page 135

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closed within 5 to 7 years), while others canhave extreme lags in both reporting and paymentofclaims
(e.g., a reporting lag of a decade for “construction defect” claims).
While the majority of general liability coverages are written on an “occurrence basis,” certain general
liability coverages (such as those covering directors andofficers or professional liability) are typically
insured on a “claims-made” basis.
General liability reserves are generally analyzed as two components: primary and excess/umbrella,
with the primary component generally analyzed separately for bodily injury and property damage. Bodily
injury liability payments reimburse the claimant for damages pertaining to physical injury as a result of the
policyholder’s legal obligation arising from non-intentional acts such as negligence, subject to the
insurance policy provisions. In some cases the damages caninclude future wage loss (which is a function of
future earnings power and wage inflation) and future medical treatment costs. Property damage liability
payments result from damages to the claimant’s private property arising from the policyholder’s legal
obligation for non-intentional acts. In most cases, property damage losses are a function of costs as of the
loss date, or soon thereafter. In addition, sizable or unique exposures are reviewed separately, such as
asbestos, environmental, other mass torts, construction defect, medical malpractice and large unique
accounts that would otherwise distort the analysis. These unique categories often require a very high
degree of judgment and require reserve analyses that do not rely on traditional actuarial methods.
Defense costs are also a part of the insured costs covered by liability policies and can be significant,
sometimes greater than the cost of the actual paid claims. For some products this risk is mitigated bypolicy
language such that the insured portion of defense costs erodes the amount of policy limit available to pay
the claim. Such “defense within the limits” policies are most common for “claims made” products. When
defense costs are outside of the limits, amounts paid for defense costs do not erode the policy limits.
This line is typically the largest source of reserve estimate uncertainty in the United States (excluding
assumed reinsurance contracts covering the same risk). Major contributors to thisreserve estimate
uncertainty include the reporting lag (i.e., the length of time between the event triggering coverage and the
actual reporting of the claim), the number of parties involved in the underlying tort action, whether the
“event” triggering coverage is confined to only one time period or is spread over multiple time periods, the
potential dollars involved (in the individual claim actions), whether such claims were reasonably
foreseeable and intended to be covered at the time the contracts were written (i.e., coverage dispute
potential), and the potential for mass claim actions. Claims with longer reporting lags result ingreater
inherent risk. This is especially true for alleged claims with a latency feature, particularly where courts have
ruled that coverage is spread over multiple policy years, hence involving multiple defendants (and their
insurers and reinsurers) and multiple policies (thereby increasing the potential dollars involved and the
underlying settlement complexity). Claims with long latencies also increase thepotential recognition lag,
i.e., the lag between writing a type of policy in a certain market and the recognition that such policies have
potential mass tort and/or latent claim exposure.