Travelers 2008 Annual Report Download - page 148

Medical risk factors
Changes in the cost of medical treatments (including prescription drugs) and underlying fee schedules
(‘‘inflation’’)
Frequency of visits to health providers
Number of medical procedures given during visits to health providers
Types of health providers used
Type of medical treatments received
Use of preferred provider networks and other medical cost containment practices
Availability of new medical processes and equipment
Changes in the use of pharmaceutical drugs
Degree of patient responsiveness to treatment
General workers’ compensation risk factors
Frequency of claim reopenings on claims previously closed
Mortality trends of injured workers with lifetime benefits and medical treatment
Degree of cost shifting between workers’ compensation and health insurance
Workers’ compensation book of business risk factors
Product mix
Injury type mix
Changes in underwriting standards
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a
change in one or more risk factors could have on reserves for workers’ compensation, a 1% increase
(decrease) in incremental paid loss development for each future calendar year could result in a 1.3%
increase (decrease) in loss reserves.
Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 2% to 2% (averaging 0%) for the Company, and from 1% to 4% (averaging
1%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on,
observed events during the year. The Company believes that its range of historical outcomes is
illustrative of reasonably possible one-year changes in reserve estimates for this product line. Workers’
compensation reserves represent approximately 30% of the Company’s total loss reserves.
The Company’s change in reserve estimate for this product line was 1% for 2008, and 0% for 2007
and 2006. The 2008 change was primarily driven by higher than anticipated medical costs related to
claims from older accident years.
Fidelity and Surety
Fidelity is generally considered a short tail coverage. It takes a relatively short period of time to
finalize and settle fidelity claims. The volatility of fidelity reserves is generally related to the type of
business of the insured, the size and complexity of the insured’s business operations, amount of policy
limit and attachment point of coverage. The uncertainty surrounding reserves for small, commercial
insureds is typically less than the uncertainty for large commercial or financial institutions. The high
frequency, low severity nature of small commercial fidelity losses provides for stability in loss estimates
whereas, the low frequency, high severity nature of losses for large insureds results in a wider range of
ultimate loss outcomes. Actuarial techniques that rely on a stable pattern of loss development are
generally not applicable to low frequency, high severity policies.
Surety has certain components that are generally considered short tail coverages with short
reporting lags, although large individual construction and commercial surety contracts can result in a
long settlement tail, based on the length and complexity of the construction project or commercial
transaction being insured. (Large construction projects can take many years to complete.) The
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