Travelers 2007 Annual Report Download - page 200

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INSURANCE CLAIM RESERVES (Continued)
2006.
In 2006, estimated claims and claim adjustment expenses included $429 million of net favorable
development for claims arising in prior years, including $394 million of net favorable prior year reserve
development impacting the Company’s results of operations which excludes $62 million of accretion of
discount.
Business Insurance. Net favorable prior year reserve development totaled $21 million in 2006,
primarily concentrated in the commercial multi-peril, general liability, property and commercial
automobile lines of business, partially offset by increases for asbestos reserves and environmental
reserves (as discussed in more detail in the following ‘‘Asbestos and Environmental Reserves’’ section),
as well as reserve strengthening for assumed reinsurance business in runoff. The commercial multi-peril
and liability lines of business experienced better than anticipated loss development that was attributable
to several factors, including improving legal and judicial environments, as well as enhanced risk control,
underwriting and claim process initiatives. The favorable prior year reserve development in the property
line of business primarily reflected less ‘‘demand surge’’ inflation than originally estimated for 2005
accident year non-catastrophe related and catastrophe losses. ‘‘Demand surge’’ refers to significant
short-term increases in building material and labor costs due to a sharp increase in demand for those
materials and services. The commercial automobile line of business experienced better than expected
loss development which was attributable to improved legal and judicial environments, claim handling
initiatives focused on the automobile line of insurance and improvements in auto safety technology.
The reserve strengthening in assumed reinsurance was primarily due to changes in projected loss
development driven by an unanticipated change in the claim settlement patterns of the underlying
casualty exposures.
Financial, Professional & International Insurance. Net favorable prior year development in 2006
totaled $14 million.
Personal Insurance. Net favorable prior year reserve development in 2006 totaled $359 million,
driven by better than expected auto bodily injury loss experience and a decline in non-catastrophe
losses in the Homeowners and Other line of business, and a reduction in loss estimates for the 2005
hurricanes. In the Automobile line of business, the improvement was partially driven by better than
expected results from changes in claim handling practices. These changes included practices which have
allowed case reserves to be established more accurately earlier in the claim settlement process, thereby
changing historical loss development patterns. In addition, industry and Company initiatives to fight
fraud in several states led to a decrease in the total number of claims and a change in historical loss
development patterns. In the Homeowners and Other line of business, favorable prior year reserve
development was partially driven by a significant decrease in the number of claims, attributable to
changes in the marketplace, including higher deductibles and fewer small-dollar claims. These changes
also resulted in a change in historical loss development patterns. In addition, non-catastrophe
Homeowners and Other loss experience was favorable due to continued evidence of a less than
expected impact from ‘‘demand surge,’’ 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. Included
in net favorable prior year reserve development in 2006 was a reduction in loss estimates for
catastrophes incurred in 2005, primarily due to lower than expected additional living expense losses
related to Hurricane Katrina.
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