Travelers 2007 Annual Report Download - page 195

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. REINSURANCE (Continued)
private compensation for insured losses resulting from acts of terrorism or war committed by or on
behalf of a foreign interest. The Program was scheduled to terminate on December 31, 2005. In
December 2005, the Terrorism Risk Insurance Extension Act of 2005 (the Terrorism Extension Act) was
enacted into Federal law, reauthorizing the Program through December 31, 2007, while reducing the
Federal role under the Program. In December 2007, the Terrorism Risk Insurance Program
Reauthorization Act of 2007 was enacted into Federal law, extending coverage to include domestic acts
of terrorism and reauthorizing the Program through 2014. The three acts are hereinafter collectively
referred to as ‘‘the Acts.’’
In order for a loss to be covered under the Program (subject losses), the loss must meet certain
aggregate industry loss minimums and must be the result of an event that is certified as an act of
terrorism by the U.S. Secretary of the Treasury. The aggregate industry loss minimum was $100 million
in 2007 and will remain at $100 million through 2014. The original Program excluded from
participation certain of the following types of insurance: Federal crop insurance, private mortgage
insurance, financial guaranty insurance, medical malpractice insurance, health or life insurance, flood
insurance, and reinsurance. The Terrorism Extension Act exempted from coverage certain additional
types of insurance, including commercial automobile, professional liability (other than directors and
officers’), surety, burglary and theft, and farm-owners multi-peril. In the case of a war declared by
Congress, only workers’ compensation losses are covered by the Acts. The Acts generally require that
all commercial property casualty insurers licensed in the United States participate in the Program.
Under the Program, a participating insurer is entitled to be reimbursed by the Federal Government for
a percentage of subject losses, after an insurer deductible, subject to an annual cap. The Federal
reimbursement percentage was 85% in 2007 and will remain at 85% through 2014.
The deductible is calculated by applying the deductible percentage to the insurer’s direct earned
premiums for covered lines from the calendar year immediately preceding the applicable year. The
deductible under the Program was 15% for 2005, 17.5% for 2006 and 20% for 2007, and will remain at
20% through 2014. The Company’s estimated deductible under the Program is $2.25 billion for 2008.
The annual cap limits the amount of aggregate subject losses for all participating insurers to
$100 billion. Once subject losses have reached the $100 billion aggregate during a program year,
Congress shall determine the sources of funds, if any, available for losses that exceed the $100 billion
cap. The Company had no terrorism-related losses in 2007, 2006 or 2005. Given the unpredictable
frequency and severity of terrorism losses, as well as the limited terrorism coverage in the Company’s
own reinsurance program, future losses from acts of terrorism, particularly those involving nuclear,
biological, chemical or radiological events, could be material to the Company’s operating results,
financial position and/or liquidity in future periods. The Company will continue to manage this type of
catastrophic risk by monitoring and controlling terrorism risk aggregations to the best of its ability.
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