Travelers 2006 Annual Report Download - page 54

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Paid loss development method .. An actuarial method to estimate ultimate losses for a given cohort of
claims such as an accident year/product line component. If the paid-
to-date losses are then subtracted from the estimated ultimate losses,
the result is an indication of theunpaid losses.
The basic premise of the method is that cumulative paid losses for a
given cohort of claims will grow in a stable, predictable pattern from
year-to-year, based on the age of the cohort. These age-to-age growth
factors are sometimes called “link ratios.”
For example, if cumulative paid losses for a product line XYZ for
accident year 2004 were$100 as of December 31, 2004 (12 months
after the start of that accident year), then grew to $120 as of
December 31, 2005 (24 months after the start), the link ratio for that
accident year from 12 to 24 months would be 1.20. If the link ratio for
other recent accident years from 12 to 24 months for that product
line were also at or around 1.20, then the method would assume a
similar result for the most recent accident year, i.e., that it too would
have its cumulative paid losses grow 120%from the 12 month to 24
month valuation.
This is repeated for each age-to-age period into the future until the
age-to-age link ratios for future periods are assumed to be 1.0 (i.e.,
the age at which cumulative losses are assumed to have stopped
growing).
A given accident year’s cumulative losses are then projected to
ultimate by multiplying current cumulative losses by successive age-
to-age link ratios up to that future age where growth is expected to
end. For example, if growth is expected to end at 60 months, then the
ultimate indication for an accident year with cumulative losses at 12
months equals those losses times a 12 to 24 month link ratio, times a
24 to 36 month linkratio, times a 36 to 48 month linkratio, times a
48 to 60 month linkratio.
Advanced applications of the method include adjustments for
changing conditions during the historical period and anticipated
changes in the future.
Pool.......................... An organization of insurers or reinsurers through which particular
types of risks are underwritten with premiums, losses and expenses
being shared in agreed-uponpercentages.
Premiums..................... The amount chargedduring the year on policies and contracts issued,
renewed or reinsured by an insurance company.
Producer ..................... Contractual entity which directs insureds to the insurer for coverage.
This term includes agents and brokers.
Property insurance............. Insurance that provides coverage to a personor business with an
insurable interest in tangible property for that person’s or business’s
property loss, damage or loss of use.
Quota share reinsurance ........ Reinsurancewherein the insurer cedes an agreed-upon fixed
percentage ofliabilities, premiums and losses for each policy covered
on a pro rata basis.