Travelers 2007 Annual Report Download - page 145

Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required homeowners reserves (beyond those included in the general discussion section) include:
Non-catastrophe risk factors
Salvage opportunities
Amount of time to return property to residential use
Changes in weather patterns
Local building codes
Litigation trends
Trends in jury awards
Catastrophe risk factors
Physical concentration of policyholders
Availability and cost of local contractors
Local building codes
Quality of construction of damaged homes
Amount of time to return property to residential use
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
Homeowners book of business risk factors
Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.)
Degree of concentration of policyholders
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 homeowners and personal lines other, 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.
Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 31% to +3% (averaging 10%) for the Company and 9% to +11%
(averaging 3%) 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.
Homeowners and personal lines other reserves represent approximately 2% of the Company’s total loss
reserves.
This line combines both liability and property coverages; however the majority of the reserves
relate to property. 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 3% for 2007, 22% for
2006 and +3% for 2005. The 2007 change was due to fewer than expected late reported claims related
to non-catastrophe weather events that occurred in the fourth quarter of 2006. In addition, a portion of
the change was attributable to a decrease in the number of claims due to changes in the marketplace,
including higher deductibles and fewer small-dollar claims. The 2006 change was due to lower than
expected additional living expenses related to Hurricane Katrina as well as better than expected
non-catastrophe related frequency and severity, due in part to changes in the marketplace, such as
higher deductibles and fewer small-dollar claims, and continued evidence of a less than expected impact
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