Travelers 2006 Annual Report Download - page 140

128
Changes in cost of medical treatments
Degree of patient responsiveness to treatment
Commercial automobile book of business risk factors
Changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.)
Changes in mix of insured vehicles (e.g., longhaul trucks versus local and smaller vehicles, fleet risks versus
non-fleets)
Changes in underwriting standards
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 automobile, a 1% increase
(decrease) in incremental paid loss development for each future calendar year could result in a 1.3%
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 -7% to +9% (averaging +1%) for the Company and -1% to +9% (averaging +2%) for
the industry overall. The Company’s year-to-year changes aredrivenby and are based on observedevents
during the year. The Company believes that its range of historical outcomes is illustrative of reasonably
possible one-year changes in reserve estimates for this product line. Commercial automobile reserves
represent approximately 7% of the Company’s total loss reserves.
The Company’s change in reserve estimate for this product line was -7% for 2006, -5% for 2005 and
-2% for 2004. The 2006 change was due to better than expected loss development, primarily for accident
years 2003 through 2005, which was attributable to favorable legal and judicial environments, claim
handling initiatives and improvements in auto safety technology. The 2005 change was due to the effect of
increasingly favorable legal and judicial environments as well as better than expected results from changes
in policy provisions as well as underwriting and pricing criteria, especially for accident year 2004. The2004
change was due to better than expected results from underwriting and pricing strategies, especially for
accident year 2003.
Workers’ Compensation
Workers’ compensation is generally considered a long tail coverage, as it takes a relatively long period
of time to finalize claims from a given accident year. While certain payments such as initial medical
treatment or temporary wage replacement for the injured worker are made quickly, some otherpayments
are made over the course of several years, such as awards for permanent partial injuries. In addition, some
payments canrun as long as the injured worker’s life, such as permanent disability benefits and on-going
medical care. Despite the possibility of long payment tails, the reporting lags are generally short,
settlements are generally not complex, and most of the liability can be considered high frequency with
moderate severity. The largest reserve risk generally comes from the low frequency, high severity claims
providing lifetime coverage for medical expense arising from a worker’s injury. Overall, the claim liabilities
for this line create a somewhat greater than moderate estimation risk.
Workers’ compensation reserves are typically analyzed in three components: indemnity losses, medical
losses and claim adjustment expenses.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required workers’ compensation reserves (beyond those included in the general discussion section)
include:
Indemnity risk factors
Time required to recover from the injury
Degree of available transitional jobs