Travelers 2007 Annual Report Download - page 29

Pricing in the homeowners business is also driven by changes in the frequency of claims and by
inflation in the cost of building supplies, labor and household possessions. Most homeowners policies
offer, but do not require, automatic increases in coverage to reflect growth in replacement costs. In
addition to the normal risks associated with any multiple peril coverage, the profitability and pricing of
homeowners insurance is affected by the incidence of natural disasters, particularly those related to
weather and earthquakes. In order to manage the Company’s exposure to catastrophe losses, Personal
Insurance limits the writing of new homeowners business and selectively takes underwriting action on
existing business in some markets. In addition, the Company has tightened underwriting standards,
implemented price increases in some catastrophe-prone areas and put in place deductibles specific to
hurricane and wind- and hail-prone areas. Personal Insurance uses computer-modeling techniques to
assess its level of exposure to loss in hurricane and earthquake catastrophe-prone areas. Changes to
methods of marketing and underwriting in some jurisdictions are subject to state-imposed restrictions,
which can make it more difficult for an insurer to significantly manage catastrophe exposures.
Insurers writing personal lines property and casualty policies may be unable to increase prices until
some time after the costs associated with coverage have increased, primarily because of state insurance
rate regulation. The pace at which an insurer can change rates in response to increased costs depends,
in part, on whether the applicable state law requires prior approval of rate increases or notification to
the regulator either before or after a rate change is imposed. In states with prior approval laws, rates
must be approved by the regulator before being used by the insurer. In states having ‘‘file-and-use’’
laws, the insurer must file rate changes with the regulator, but does not need to wait for approval
before using the new rates. A ‘‘use-and-file’’ law requires an insurer to file rates within a period of time
after the insurer begins using the new rate. Approximately one-half of the states require prior approval
of most rate changes. The Company’s ability or willingness to raise prices, modify underwriting terms or
reduce exposure to certain geographies may be limited due to considerations of public policy, the
evolving political environment and/or social responsibilities. The Company also may choose to write
business it might not otherwise write for strategic purposes, such as improving access to other
underwriting opportunities.
Independent agents either utilize one of the Company’s automated quote and issue systems or they
submit applications to the Company’s service centers for underwriting review, quote, and issuance.
Automated transactions are edited by the Company’s systems and issued if they conform to established
guidelines. Exceptions are reviewed by underwriters in the Company’s business centers. Audits are
conducted by an internal peer review team across all of the Company’s independent agency generated
business on a systematic sampling basis. Each agent is assigned to a specific employee or team of
employees responsible for working with the agent on business plan development, marketing, and overall
growth and profitability. The Company uses agency level management information to analyze and
understand results and to identify problems and opportunities.
The Personal Insurance products sold through additional marketing channels utilize the same
issuance systems discussed previously and exceptions are underwritten by the Company’s employees.
Underwriters work with Company management on business plan development, marketing, and overall
growth and profitability. Channel-specific production and claim information is used to analyze results
and identify problems and opportunities.
Product Lines
The primary coverages in Personal Insurance are personal automobile and homeowners insurance
sold to individuals. Personal Insurance had approximately 7.2 million policies in force at December 31,
2007.
Personal Automobile provides coverage for liability to others for both bodily injury and property
damage and for physical damage to an insured’s own vehicle from collision and various other perils. In
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