Travelers 2007 Annual Report Download - page 140

Commercial automobile book of business risk factors
Changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.)
Changes in mix of insured vehicles (e.g., long haul trucks versus local and smaller vehicles, fleet risks
versus non-fleets)
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 commercial automobile, a 1% increase
(decrease) in incremental paid loss development for each future calendar year could result in a 1.3%
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 10% to +9% (averaging 1%) for the Company and 2% to +9%
(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.
Commercial automobile reserves represent approximately 7% of the Company’s total loss reserves.
The Company’s change in reserve estimate for this product line was 10% for 2007, 7% for
2006 and 5% for 2005. The 2007 change was due to better than expected loss development, for
recent accident years, as a result of more favorable legal and judicial environments, claim handling
initiatives and improvements in auto safety technology. The 2006 change was due to better than
expected loss development, primarily for accident years 2003 through 2005, which was attributable to
favorable legal and judicial environments, claim handling initiatives and improvements in auto safety
technology. The 2005 change was due to the effect of increasingly favorable legal and judicial
environments as well as better than expected results from changes in policy provisions as well as
underwriting and pricing criteria, especially for accident year 2004.
Workers’ Compensation
Workers’ compensation is generally considered a long tail coverage, as it takes a relatively long
period of time to finalize claims from a given accident year. While certain payments such as initial
medical treatment or temporary wage replacement for the injured worker are made quickly, some other
payments are made over the course of several years, such as awards for permanent partial injuries. In
addition, some payments can run as long as the injured worker’s life, such as permanent disability
benefits and on-going medical care. Despite the possibility of long payment tails, the reporting lags are
generally short, settlements are generally not complex, and most of the liability can be considered high
frequency with moderate severity. The largest reserve risk generally comes from the low frequency, high
severity claims providing lifetime coverage for medical expense arising from a worker’s injury. Overall,
the claim liabilities for this line create a somewhat greater than moderate estimation risk.
Workers’ compensation reserves are typically analyzed in three components: indemnity losses,
medical losses and claim adjustment expenses.
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