Travelers 2007 Annual Report Download - page 138

Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 34% to +26% (averaging 5%) for the Company and 14% to +7%
(averaging 1%) for the industry overall. The 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. Property reserves represent approximately 4% of the Company’s
total loss reserves.
While property is considered a short tail coverage, the one year change can be more volatile than
the longer tail product lines. This is due to the fact that the majority of the reserve relates to the most
recent accident year, which is subject to the most uncertainty for all product lines. This recent accident
year uncertainty is relevant to property due to weather related events which tend to be concentrated in
the last half of the year and generally do not clearly resolve until the following year.
The Company’s change in reserve estimate for this product line was 18% for 2007, 11% for
2006 and 34% for 2005. The 2007 change was due to fewer than expected late reported claims
related to non-catastrophe weather events that occurred late in 2006 as well as better than expected
frequency and severity due in part to changes in the marketplace, such as higher deductibles and lower
policy limits. In addition, the property product line experienced better than expected large loss
outcomes which were partially attributable to favorable litigation resolutions. The 2006 change primarily
reflected less ‘‘demand surge’’ inflation than originally estimated for 2005 accident year non-catastrophe
and catastrophe losses. The 2005 change was primarily due to better than expected results from
changes in policy provisions as well as underwriting and pricing criteria. The reserve estimates for this
product line are also potentially subject to material changes due to uncertainty in measuring ultimate
losses for unprecedented significant catastrophes such as the events of September 11, 2001 and
Hurricane Katrina. Such material changes did not materialize in 2007, 2006 or 2005.
Commercial Multi-Peril
Commercial multi-peril provides a combination of property and liability coverage typically for small
businesses and, therefore, includes both short and long tail coverages. For property coverage, it
generally takes a relatively short period of time to close claims, while for the other coverages, generally
for the liability coverages, it takes a longer period of time to close claims.
The reserving risk for this line is dominated by the liability coverage portion of this product, except
occasionally in the event of catastrophic or large single losses. The reserving risk for this line differs
from that of the general liability product line and the property product line due to the nature of the
customer. Commercial multi-peril is generally sold to smaller sized accounts, while the customer profile
for general liability and property include larger customers.
See ‘‘Property risk factors’’ and General liability risk factors,’’ discussed above, with regard to
reserving risk for commercial multi-peril.
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 commercial multi-peril (excluding
asbestos and environmental), a 1% increase (decrease) in incremental paid loss development for each
future calendar year could result in a 1.2% increase (decrease) in loss reserves.
Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 8% to +2% (averaging 4%) for the Company and 2% to +6% (averaging
+2%) for the industry overall. The Company’s year-to-year changes are driven by and are based on
observed events during the year. The Company believes that its range of historical outcomes is
illustrative of reasonably possible one-year changes in reserve estimates for this product line.
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