Travelers 2007 Annual Report Download - page 143

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 fidelity and surety, 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 7% to +138% (averaging +21%) for the Company and 9% to +24%
(averaging +7%) 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 was due to
acquired business in 2004, 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. Fidelity
and surety reserves represent approximately 3% of the Company’s total loss reserves.
In general, developments on single large claims (both adverse and favorable) are a primary source
of changes in reserve estimates for this product line.
The Company’s change in reserve estimate for this product line was 1% for 2007, 5% for 2006
and 0% for 2005. The 2006 change was due to better than expected large loss activity.
Personal Automobile
Personal automobile includes both short and long tail coverages. The payments that are made
quickly typically pertain to auto physical damage (property) claims and property damage (liability)
claims. The payments that take longer to finalize and are more difficult to estimate relate to bodily
injury claims. Reporting lags are relatively short and the claim settlement process for personal
automobile liability generally is the least complex of the liability products. It is generally viewed as a
high frequency, low to moderate severity product line. Overall, the claim liabilities for this line create a
moderate estimation risk.
Personal automobile reserves are typically analyzed in five components: bodily injury liability,
property damage liability, no-fault losses, collision claims and comprehensive claims. These last two
components have minimum reserve risk and fast payouts and, accordingly, separate factors are not
presented.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required personal automobile reserves (beyond those included in the general reserve discussion section)
include:
Bodily injury and property damage liability risk factors
Trends in jury awards
Changes in the underlying court system and its philosophy
Changes in case law
Litigation trends
Frequency of claims with payment capped by policy limits
Change in average severity of accidents, or proportion of severe accidents
Subrogation opportunities
Degree of patient responsiveness to treatment
Changes in claim handling philosophies
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