Travelers 2006 Annual Report Download - page 37

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For instance, the “cumulative deficiency (redundancy)” shown in the accompanying table for each
year represents the aggregate amount by which original estimates of reserves as of that year-end have
changed in subsequent years. Accordingly, the cumulative deficiency for a year relates only to reserves at
that year-end and those amounts are not additive. Expressed another way, if the original reserves at the
end of 1996 included $4 million for a loss that is finally paid in 2005 for $5 million, the $1 million deficiency
(the excess of the actual payment of $5 million over the original estimate of $4 million) would be included
in the cumulative deficiencies in each of the years 1996 to2004 shown in the accompanying table.
Various factors may distort the re-estimated reserves and cumulative deficiency or redundancy shown
in the accompanying table. For example, a substantial portion of the cumulative deficiencies shown in the
accompanying table arise from claims on policies written prior to the mid-1970s involving liability
exposures such as asbestos and environmental claims. In the post-1984 period, the Company has developed
more stringent underwriting standards andpolicy exclusions andhas significantly contracted or terminated
the writing ofthese risks. See “Item 7—Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Asbestos Claims and Litigation,” and “—Environmental Claims and Litigation.”
General conditions and trends that have affected thedevelopment of these liabilities in the past will not
necessarily recur in the future.
Other factors that affect the data in the accompanying table include the discounting of certain
reserves, as discussed above, and the use of retrospectively rated insurance policies. For example, workers’
compensation indemnity reserves (tabular reserves) are discounted to reflect the time value of money.
Apparent deficiencies will continue to occur as the discount on these workers’ compensation reserves is
accreted at the appropriate interest rates. Also, a portion of National Accounts business is underwritten
with retrospectively rated insurance policies in which the ultimate loss experience is primarily borne by the
insured. For this business, increases in loss experience result in an increase in reserves and an offsetting
increase in amounts recoverable from insureds. Likewise,decreases in loss experience result in a decrease
in reserves and an offsetting decrease in amounts recoverable from these insureds. The amounts
recoverable on these retrospectively rated policies mitigate the impact of the cumulative deficiencies or
redundancies on the Company’s earnings but are not reflected in the accompanying table.