Travelers 2006 Annual Report Download - page 136

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The amount of reserve estimate uncertainty also varies significantly by component for the general
liability product line. The components in this product line with the longest latency, longest reporting lags,
largest potential dollars involved, and greatest claim settlement complexity are asbestos and
environmental. Components that include latency, reporting lag and/or complexity issues, but to a
materially lesser extent than asbestos and environmental, include construction defect, medical malpractice,
and other mass tort actions. Many components of general liability are not subject to material latency or
claim complexity risks and hencehave materially less uncertainty than the previously mentioned
components. In general, policies providing coverage with shorter reporting lags, fewer parties involved in
settlement negotiations, only one policy potentially triggered per claim, fewer potential settlement dollars,
reasonably foreseeable (andstable) potential hazards/claims and no mass tort potential result in much less
reserve estimate uncertainty than policies without those characteristics.
Besides the traditional actuarial methods mentioned in the general discussion section, the company
utilizes various report year development methods and S-curves for the construction defect components of
this product line. The Construction Defect report year development analysis is supplemented with
projected claim counts and average values for IBNR claim counts. For components with greater lags in
claim reporting, such as excess and umbrella components of this product line, the company utilizes the BF
method more heavily than paid and case incurred development.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required general liability reserves (beyond those included in the general discussion section) include:
General liability risk factors
Changes in claim handling philosophies
Changes in policy provisions orcourt interpretation of such provision
New theories of liability
Trends in jury awards
Changes in the propensity to sue, in general with specificity to particular issues
Changes in statutes of limitations
Changes in the underlying court system
Distortions from losses resulting from large single accounts or single issues
Changes in tort law
Shifts in law suit mix between federal and state courts
Changes in claim adjuster office structure (causing distortions in thedata)
Changes in settlement patterns (e.g., medical malpractice)
General liability book of business risk factors
Changes in policy provisions (e.g., deductibles, policy limits, endorsements)
Changes in underwriting standards
Product mix (e.g., size of account, industries insured, jurisdiction mix)
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a
change in one or more risk factors could have on reserves for general liability (excluding asbestos and
environmental), a 1% increase (decrease)in incremental paid loss development for each future calendar
year could result in a 1.6% increase (decrease) in loss reserves.