Travelers 2007 Annual Report Download - page 134

The results of such methodologies are subjected to various reasonability and diagnostic tests,
including paid-to-incurred loss ratios, implied incurred-loss-to-earned-premium ratios and non-zero
claim severity trends. An actual versus expected analysis is also performed comparing actual loss
development to expected development based on the prior review. Additional analysis may be performed
based on the results of these diagnostics, including the investigation of other actuarial methods.
The above is generally utilized to evaluate management’s existing estimate for prior accident
periods. For the initial estimate of the current accident year, the available claim data is typically
insufficient to produce a reliable indication. Hence, the initial estimate for an accident year is generally
based on a loss ratio projection method, which uses the earned premium for the current year multiplied
by a projected loss ratio. The projected loss ratio is determined through analysis of prior experience
periods using loss trend, rate level differences, mix of business changes and other known or observed
factors influencing the current accident year relative to prior accident years. The exact number of prior
accident years utilized varies by product line component, based on the volume of business for that
component and the reliability of an individual accident year estimate.
Management’s estimates
At least once per quarter, certain Company management meets with its actuaries to review the
latest claims and claim adjustment expense reserve analyses. Based on these analyses, management
determines whether its ultimate claim liability estimates should be changed. In doing so, it must
evaluate whether the new data provided represents credible actionable information or an anomaly that
will have no effect on estimated ultimate claim liability. For example, as described above, payments
may have decreased in one geographic region due to fewer claim adjusters being available to process
claims. The resulting claim payment patterns would be analyzed to determine whether or not the
change in payment pattern represents a change in ultimate claim liability.
Such an assessment requires considerable judgment. It is frequently not possible to determine
whether a change in the data is an anomaly until sometime after the event. Even if a change is
determined to be permanent, it is not always possible to reliably determine the extent of the change
until sometime later. The overall detailed analyses supporting such an effort can take several months to
perform. This is due to the need to evaluate the underlying cause of the trends observed, and may
include the gathering or assembling of data not previously available. It may also include interviews with
experts involved with the underlying processes. As a result, there can be a time lag between the
emergence of a change and a determination that the change should be reflected in the Company’s
estimated claim liabilities. The final estimate selected by management in a reporting period is based on
these various detailed analyses of past data, adjusted to reflect any new actionable information.
Discussion of Product Lines
The following section details reserving considerations and common risk factors by product line.
There are many additional risk factors that may impact ultimate claim costs. Each risk factor presented
will have a different impact on required reserves. Also, risk factors can have offsetting or compounding
effects on required reserves. For example, in workers’ compensation, the use of expensive medical
procedures that result in medical cost inflation may enable workers to return to work faster, thereby
lowering indemnity costs. Thus, in almost all cases, it is impossible to discretely measure the effect of a
single risk factor and construct a meaningful sensitivity expectation.
In order to provide information on reasonably possible reserving changes by product line, the
historical changes in year-end loss reserves over a one-year period are provided for the U.S. product
lines. This information is provided for both the Company and the industry for the nine most recent
years, and is based on the most recent publicly available data for the reported line(s) that most closely
match the individual product line being discussed. These changes were calculated, net of reinsurance,
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