Travelers 2006 Annual Report Download - page 145

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Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required homeowners reserves (beyond those included in the general reserve discussion section) include:
Non-catastrophe risk factors
Salvage opportunities
Amount of time to return property to residential use
Changes in weather patterns
Local building codes
Litigation trends
Trends in jury awards
Catastrophe risk factors
Physical concentration of policyholders
Availability and cost of local contractors
Local building codes
Qualityof construction of damagedhomes
Amount of time to return property to residential use
For the more severe catastrophic events, “demand surge” inflation, which refers to significant short-term
increases in building material and labor costs due to a sharp increase in demand for those materials and
services
Homeowners book of business risk factors
Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.)
Degree of concentration of policyholders
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 homeowners and personal lines other, a 1% increase
(decrease) in incremental paid loss development for each future calendar year could result in a 1.1%
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 -31% to +3% (averaging -11%) for theCompany and -9% to +11% (averaging -2%) for
the industry overall. The Company’s year-to-year changes are driven by and are based on observed events
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. Homeowners andpersonal lines other
reserves represent approximately 2% of the Company’s total loss reserves.
This line combines both liability and property coverages; however the majority of the reserves relate
to property. 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 recent accident year
uncertainty is relevant to property due to weather related events which tend to be concentrated in the last
half of the year and generally do not clearly resolve until the following year.
The Company’s change in reserve estimate for this product line was -22% for 2006, +3% for 2005
and -31% for 2004. The 2006 change was due to lower than expected additional living expenses related to
Hurricane Katrina as well as better than expected non-catastrophe related frequency and severity, due in
partto changes in the marketplace, such as higher deductibles and fewer small-dollar claims, and
continued evidence of a lessthanexpected impact from demand surge. The 2005 change was driven by
additional loss development from the 2004 Florida hurricanes. The 2004 change was driven by favorable