Travelers 2007 Annual Report Download - page 205

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INSURANCE CLAIM RESERVES (Continued)
Catastrophe Exposure
The Company has geographic exposure to catastrophe losses, which can be caused by various
natural and man-made events including hurricanes, windstorms, tornadoes, earthquakes, hail, severe
winter weather, explosions and fires. The incidence and severity of catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of the event. Most catastrophes are
restricted to small geographic areas; however, hurricanes and earthquakes may produce significant
damage in larger areas, especially those that are heavily populated. The Company generally seeks to
reduce its exposure to catastrophes through individual risk selection and the purchase of catastrophe
reinsurance.
There are also risks which impact the estimation of ultimate costs for catastrophes. For example,
the estimation of reserves related to hurricanes can be affected by the inability of the Company and its
insureds to access portions of the impacted areas, the complexity of factors contributing to the losses,
the legal and regulatory uncertainties and the nature of the information available to establish the
reserves. Complex factors include, but are not limited to: determining whether damage was caused by
flooding versus wind; evaluating general liability and pollution exposures; estimating additional living
expenses; the impact of demand surge; infrastructure disruption; fraud; the effect of mold damage and
business interruption costs; and reinsurance collectibility. The timing of a catastrophe’s occurrence, such
as at or near the end of a reporting period, can also affect the information available to us in estimating
reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims
emerge.
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