Travelers 2006 Annual Report Download - page 205

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
193
6. INSURANCE CLAIM RESERVES (Continued)
estimates, or a range of either, cannot now be reasonably estimated and could result in income statement
charges that could be material to the Company’s operating results in futureperiods.
Catastrophe Exposure
The Company has geographic exposure to catastrophe losses in certain areas of the country.
Catastrophes can be caused by various natural and man-made events includinghurricanes, windstorms,
earthquakes, hail, severe winter weather, explosions and fires. The incidence and severity of catastrophes
are inherently unpredictable. The extent of losses froma catastrophe is a function of both the total amount
of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are
restricted to small geographic areas; however, hurricanes and earthquakes may produc esignificant damage
in larger areas, especially those that are heavily populated. The Company generally seeks to reduce its
exposure to catastrophes through individual risk selection and thepurchase of catastrophe reinsurance.
There are also risks which impact the estimation of ultimate costs for catastrophes. For example, the
insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the
Complex factors include, but are not limited to: determining whether damage was caused by flooding
versus wind; evaluating general liability andpollution exposures; estimating additional living expenses; the
impact of demand surge; infrastructure disruption; fraud; the effect of mold damage and business
interruption costs; and reinsurance collectibility. The timing of a catastrophe’s occurrence, such as at or
near the end of a reporting period, can also affect the information available to us in estimating reserves for
that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge.
legal and regulatory uncertainties, and the nature of the information available to establish the reserves.
estimation of reserves related to hurricanes can be affected by the inability of the Company and its