Travelers 2008 Annual Report Download - page 151

Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 9% to 1% (averaging 4%) for the Company, and from 4% to 0%
(averaging 2%) 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.
Personal automobile reserves represent approximately 5% of the Company’s total loss reserves.
The Company’s change in reserve estimate for this product line was 1% for 2008, 5% for 2007
and 7% for 2006. The decreases in 2008, 2007 and 2006 were primarily due to better than expected
results from changes in claim handling practices as well as initiatives to fight fraud.
Homeowners and Personal Lines Other
Homeowners is generally considered a short tail coverage. Most payments are related to the
property portion of the policy, where the claim reporting and settlement process is generally restricted
to the insured and the insurer. Claims on property coverage are typically reported soon after the actual
damage occurs, although delays of several months are not unusual. The claim is settled when the two
parties agree on the amount due in accordance with the policy contract language and the appropriate
payment is made (or alternatively, the property replacement/repair is performed by the insurer). The
resulting settlement process is typically fairly short term, although exceptions do exist.
The liability portion of the homeowners policy generates claims which take longer to pay due to
the involvement of litigation and negotiation, but with generally small reporting lags. In addition,
reserves related to umbrella coverages have greater uncertainty since umbrella liability payments are
often made far into the future.
Overall, the line is generally high frequency, low to moderate severity (except for catastrophes),
with simple to moderate claim complexity.
Homeowners reserves are typically analyzed in two components: non-catastrophe related losses and
catastrophe loss payments.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required homeowners reserves (beyond those included in the general discussion section) include:
Non-catastrophe risk factors
Salvage opportunities
Amount of time to return property to residential use
Changes in weather patterns
Local building codes
Litigation trends
Trends in jury awards
Catastrophe risk factors
Physical concentration of policyholders
Availability and cost of local contractors
Local building codes
Quality of construction of damaged homes
Amount of time to return property to residential use
For the more severe catastrophic events, ‘‘demand surge’’ inflation, 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
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