Travelers 2006 Annual Report Download - page 138

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While property is considered a short tail coverage, the one year change can be more volatile than the
longer tail product lines. This is due to the fact that the majority of the reserve relates to the most recent
accident year, which is subject to the most uncertainty for all product lines. This recentaccident year
uncertainty is relevant to property due to weather related events which tend to be concentrated in the last
half of the year andgenerally don’t clearly resolve until the following year.
The Company’s change in reserve estimate for this product line was -11% for 2006, -34% for 2005
and -18% for 2004. The 2006 change primarily reflected less “demand surge” inflation than originally
estimated for 2005 accident year non-catastrophe and catastrophe losses. The 2005 and 2004 changes were
primarily due to better than expected results fromchanges in policy provisions as well as underwriting and
pricing criteria. The reserve estimates for this product line are also potentially subject to material changes
due to uncertainty in measuring ultimate losses for unprecedented significant catastrophes such as the
events ofSeptember 11, 2001 and Hurricane Katrina. Such material changes did not materialize in2006,
2005 or 2004.
Commercial Multi-Peril
Commercial multi-peril provides a combination of property and liability coverage typically for small
businesses and, therefore, includes both short and long tail coverages. For property coverage, it generally
takes a relatively short period of time to close claims, while for the other coverages,generally for the
liability coverages, it takes a longer period of time to close claims.
The reserving risk for this line is dominated by the liability coverage portion of this product, except
occasionally in the event of catastrophic or large single losses. The reserving risk for this line differs from
that of the general liability product line and the property product line due to the nature of the customer.
Commercial multi-peril is generally sold to smaller sized accounts, while the customer profile for general
liability and property include larger customers.
See “Property risk factors” and “General liability risk factors,” discussed above, with regard to
reserving risk for commercial multi-peril.
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 commercial multi-peril (excluding asbestos
and environmental), a 1% increase (decrease) in incremental paid loss development for each future
calendar year could result in a 1.2% increase (decrease) in loss reserves.
Historically, the one-year change in the reserve estimate for this product line over the last nine years
has varied from -34% to +26% (averaging -4%) for the Company and -14% to +7% (averaging 0%) for
the industry overall. The Company’s year-to-year changes are driven by and are based on observed events
during the year. Because the highend of the Company’s range of historical adverse development came
fromcertain business that has since beenexited, the Company believes that the industry’s range of
historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this
product line.