Travelers 2007 Annual Report Download - page 137

Company’s year-to-year changes are driven by and are based on observed events during the year.
Because the high end of the Company’s range of historical adverse development came from certain
business that has since been exited, the Company believes that the industry’s range of historical
outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product
line. General liability reserves (excluding asbestos and environmental) represent approximately 27% of
the Company’s total loss reserves.
The Company’s change in reserve estimate for this product line, excluding estimated asbestos and
environmental amounts, was 2% for 2007, +2% for 2006 and +4% for 2005. The 2007 change was
driven by better than expected loss development for recent accident years attributable to several
factors, including improved legal and judicial environments, as well as enhanced risk control,
underwriting and claim process initiatives. The 2006 change largely resulted from directors and officers
and errors and omissions adjustments due to worse than expected large loss activity and additional
information from detailed claim reviews, primarily associated with accident years 2002 and 2003. The
2005 change was the net result of numerous adjustments for various components with no individual
item being a primary driver.
Property
Property is generally considered a short tail line with a simpler and faster claim reporting and
adjustment process than liability coverages, and less uncertainty in the reserve setting process (except
for more complex business interruption claims). It is generally viewed as a moderate frequency, low to
moderate severity line, except for catastrophes and coverage related to large properties. The claim
reporting and settlement process for property coverage claim reserves is generally restricted to the
insured and the insurer. Overall, the claim liabilities for this line create a low estimation risk, except
possibly for catastrophes and business interruption claims.
Property reserves are typically analyzed in two components, one for catastrophic or other large
single events, and another for all other events. Examples of common risk factors, or perceptions
thereof, that could change and, thus, affect the required property reserves (beyond those included in
the general discussion section) include:
Property risk factors
Physical concentration of policyholders
Availability and cost of local contractors
For the more severe catastrophic events, ‘‘demand surge’’ inflation, which refers to significant
short-term increases in building material and labor costs due to a sharp increase in demand for those
materials and services
Local building codes
Amount of time to return property to full usage (for business interruption claims)
Court interpretation of policy provisions (such as occurrence definition, or wind versus flooding)
Lags in reporting claims (e.g., winter damage to summer homes, hidden damage after an earthquake)
Court or legislative changes to the statute of limitations
Property book of business risk factors
Policy provisions mix (e.g., deductibles, policy limits, endorsements)
Changes in underwriting standards
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a
change in one or more risk factors could have on reserves for property, a 1% increase (decrease) in
incremental paid loss development for each future calendar year could result in a 1.1% increase
(decrease) in loss reserves.
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