Travelers 2006 Annual Report Download - page 29

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the business and a reasonable allowance for profit and contingencies. The Company has a disciplined
approach to underwriting and risk management that emphasizes profitable growth rather thanpremium
volume or market share.
Personal Insurance hasdeveloped a product management methodology that integrates thedisciplines
of underwriting, claim, actuarial and product dev elopment. This approach is designed to maintain high
quality underwriting discipline and pricing segmentation. Proprietary data is analyzed with respect to
Personal Insurance’s business over many years. Personal Insurance uses a variety of proprietary and
vendor produced risk differentiation models to facilitate its pricing segmentation. Personal Insurance’s
product managers establish strict underwriting guidelines integrated with its filed pricing and rating plans,
which enable Personal Insurance to streamline its risk selection andpricing processes.
Pricing for personal automobile insurance is driven by changes in the frequency of claims and by
inflation in the cost of automobile repairs, medical care and litigation of liability claims. As a result, the
profitability of the business is largely dependent on promptly identifying and rectifying disparities between
premium levels andprojected claim costs, and obtaining approvalfrom state regulatory authorities when
necessary for filed rate changes.
Pricing in the homeowners business is also driven by changes in the frequency of claims and by
inflation in the cost of building supplies, labor and householdpossessions. Most homeowners policies offer,
but do not require, automatic increases in coverage to reflect growth in replacement costs and property
values. In addition to the normal risks associated with any multiple peril coverage, the profitability and
pricing of homeowners insurance is affected by the incidence of natural disasters, particularly those related
to weather and earthquakes. In order to reduce the Company’s exposure to catastrophe losses, Personal
Insurance limits the writing of new homeowners business and selectively takes underwriting action on
existing business in some markets. In addition, underwriting standards have been tightened, price increases
have been implemented in some catastrophe-prone areas, and deductibles are in place in hurricane and
wind and hail prone areas. Personal Insurance uses computer-modeling techniques to assess its level of
exposure to loss in hurricane and earthquake catastrophe-prone areas. Changes to methods of marketing
and underwriting in some jurisdictions are subject to state-imposed restrictions, which can make it more
difficult for an insurer to significantly reduce catastrophe exposures.
Insurers writingpersonal lines property and casualty policies may be unable to increase prices until
some time after the costs associated with coverage have increased, primarily because of state insurance
rate regulation. The pace at which an insurer can change rates in response to increased costs depends, in
part, on whether the applicable state law requires prior approval of rate increases or notification to the
regulator either before or after a rate change is imposed. In states with prior approvallaws, rates must be
approved by the regulator before being used by the insurer. In states having “file-and-use” laws, the insurer
must file rate changes with the regulator, but does not need to wait for approval before using the new rates.
A “use-and-file” law requires an insurer to file rates within a period of time after the insurer begins using
the new rate. Approximately one-half of the states require prior approval of most rate changes. The
Company’s ability or willingness to raise prices, modify underwriting terms or reduce exposure to certain
geographies may be limited due to considerations of public policy, the evolving political environment
and/or social responsibilities. The Company also may choose to write business it might not otherwise write
for strategic purposes, such as improving access to other underwriting opportunities.
Independent agents either utilize one ofthe Company’s automated quote and issue systems or they
submit applications to the Company’s service centers for underwriting review, quote, and issuance.
Automated transactions are edited by the Company’s systems and issued if they conform to established
guidelines. Exceptions are reviewed by underwriters in the Company’s business centers. Audits are
conducted by business center underwriters and agency managers, on a systematic sampling basis, across all
of the Company’s independent agency generated business. Each agent is assigned to a specific employee or