Travelers 2007 Annual Report Download - page 133

The effect of a particular risk factor on estimates of claim liabilities cannot be isolated in most
cases. For example, estimates of potential claim settlements may be impacted by the risk associated
with potential court rulings, but the final settlement agreement typically does not delineate how much
of the settled amount is due to this and other factors.
The evaluation of data is also subject to distortion from extreme events or structural shifts,
sometimes in unanticipated ways. For example, the timing of claims payments in one geographic region
will be impacted if claim adjusters are temporarily reassigned from that region to help settle
catastrophe claims in another region.
While some changes in the claim environment are sudden in nature (such as a new court ruling
affecting the interpretation of all contracts in that jurisdiction), others are more evolutionary.
Evolutionary changes can occur when multiple factors affect final claim values, with the uncertainty
surrounding each factor being resolved separately, in stepwise fashion. The final impact is not known
until all steps have occurred.
Sudden changes generally cause a one-time shift in claim liability estimates, although there may be
some lag in reliable quantification of their impact. Evolutionary changes generally cause a series of
shifts in claim liability estimates, as each component of the evolutionary change becomes evident and
estimable.
Actuarial methods for analyzing and estimating claims and claim adjustment expense reserves.
The principal estimation and analysis methods utilized by the Company’s actuaries are the paid
development method, the case incurred development method, the Bornhuetter-Ferguson (BF) method,
and average value analysis combined with the reported claim development method. The BF method is
usually utilized for more recent accident periods, with a transition to other methods as the underlying
claim data becomes more voluminous and therefore more credible. These are typically referred to as
traditional actuarial methods. (See Glossary for an explanation of these methods.)
While these are the principal methods utilized throughout the Company, those evaluating a
particular component for a product line have available to them the full range of methods developed
within the casualty actuarial profession. The Company’s actuaries are also continually monitoring
developments within the profession for advances in existing techniques or the creation of new
techniques that might improve current and future estimates.
Some components of product line reserves are susceptible to relatively infrequent large claims that
can materially impact the total estimate for that component. In such cases, the Company’s actuarial
analysis generally isolates and analyzes separately such large claims. The reserves excluding such large
claims are generally analyzed using the traditional methods described above. The reserves associated
with large claims are then analyzed utilizing various methods, such as:
• Estimating the number of large claims and their average values based on historical trends from
prior accident periods, adjusted for the current environment and supplemented with actual data
for the accident year analyzed to the extent available.
• Utilizing individual claim adjuster estimates of the large claims, combined with continual
monitoring of the aggregate accuracy of such claim adjuster estimates. (This monitoring may
lead to supplemental adjustments to the aggregate of such claim estimates.)
• Utilizing historic longer-term average ratios of large claims to small claims, and applying such
ratios to the estimated ultimate small claims from traditional analysis.
• Ground-up analysis of the underlying exposure (typically used for asbestos and environmental).
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