Travelers 2007 Annual Report Download - page 54

Paid development method ..... An actuarial method to estimate ultimate losses for a given cohort
of claims such as an accident year/product line component. If the
paid-to-date losses are then subtracted from the estimated ultimate
losses, the result is an indication of the unpaid losses.
The basic premise of the method is that cumulative paid losses for
a given cohort of claims will grow in a stable, predictable pattern
from year-to-year, based on the age of the cohort. These age-to-age
growth factors are sometimes called ‘‘link ratios.’’
For example, if cumulative paid losses for a product line XYZ for
accident year 2004 were $100 as of December 31, 2004 (12 months
after the start of that accident year), then grew to $120 as of
December 31, 2005 (24 months after the start), the link ratio for
that accident year from 12 to 24 months would be 1.20. If the link
ratio for other recent accident years from 12 to 24 months for that
product line were also at or around 1.20, then the method would
assume a similar result for the most recent accident year, i.e., that it
too would have its cumulative paid losses grow 120% from the
12 month to 24 month valuation.
This is repeated for each age-to-age period into the future until the
age-to-age link ratios for future periods are assumed to be 1.0
(i.e., the age at which cumulative losses are assumed to have
stopped growing).
A given accident year’s cumulative losses are then projected to
ultimate by multiplying current cumulative losses by successive
age-to-age link ratios up to that future age where growth is
expected to end. For example, if growth is expected to end at
60 months, then the ultimate indication for an accident year with
cumulative losses at 12 months equals those losses times a 12 to
24 month link ratio, times a 24 to 36 month link ratio, times a 36 to
48 month link ratio, times a 48 to 60 month link ratio.
Advanced applications of the method include adjustments for
changing conditions during the historical period and anticipated
changes in the future.
Pool..................... An organization of insurers or reinsurers through which particular
types of risks are underwritten with premiums, losses and expenses
being shared in agreed-upon percentages.
Premiums................. The amount charged during the year on policies and contracts
issued, renewed or reinsured by an insurance company.
Producer ................. Contractual entity which directs insureds to the insurer for
coverage. This term includes agents and brokers.
Property insurance .......... Insurance that provides coverage to a person or business with an
insurable interest in tangible property for that person’s or business’s
property loss, damage or loss of use.
Quota share reinsurance ...... Reinsurance wherein the insurer cedes an agreed-upon fixed
percentage of liabilities, premiums and losses for each policy
covered on a pro rata basis.
42