Travelers 2008 Annual Report Download - page 152

Homeowners book of business risk factors
Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.)
Degree of concentration of policyholders
Changes in underwriting standards
Changes in the use of credit data for rating and underwriting
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 homeowners and personal lines other, a
1% increase (decrease) in incremental paid loss development for each future calendar year could result
in a 1.1% 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 31% to 3% (averaging 11%) for the Company, and from 8% to 11%
(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.
Homeowners and personal lines other reserves represent approximately 3% of the Company’s total loss
reserves.
This line combines both liability and property coverages; however, the majority of the reserves
relate to property. While property is considered a short tail coverage, the one year change for property
can be more volatile than that for the longer tail product lines. This is due to the fact that the majority
of the reserve for property relates to the most recent accident year, which is subject to the most
uncertainty for all product lines. This recent accident year uncertainty is relevant to property because of
weather related events which tend to be concentrated in the second half of the year, and generally are
not completely resolved until the following year. Reserve estimates associated with major catastrophes
may take even longer to resolve.
The Company’s change in reserve estimate for this product line was 13% for 2008, 3% for
2007 and 22% for 2006. The 2008 change was primarily driven by favorable loss experience related to
Hurricane Katrina, by claim initiatives, by better than expected outcomes on 2007 catastrophe-related
claims and by improvements in older accident years for the umbrella line. The 2007 change was due to
fewer than expected late reported claims related to non-catastrophe weather events that occurred in the
fourth quarter of 2006. In addition, a portion of the change was attributable to a decrease in the
number of claims due to changes in the marketplace, including higher deductibles and fewer small-
dollar claims. The 2006 change was due to lower than expected additional living expenses related to
Hurricane Katrina as well as better than expected non-catastrophe related frequency and severity, due
in part to changes in the marketplace, such as higher deductibles and fewer small-dollar claims, and
continued evidence of a less than expected impact from demand surge.
International and other
International and other includes products written by International and other products not discussed
above. The principal component of ‘‘other’’ claim reserves is assumed reinsurance written on an
excess-of-loss basis, which may include reinsurance of non-U.S. exposures, and is runoff business.
International and other claim liabilities result from a mix of coverages, currencies and jurisdictions/
countries. The common characteristic is the need to customize the analysis to the individual
component, and the inability to rely on data characterizations and reporting requirements in the U.S.
statutory reporting framework.
Due to changes in the business mix for this line over time, the recently incurred claim liabilities
are relatively short term (due to both the products and the jurisdictions involved, e.g., the Republic of
Ireland and the United Kingdom), while the older liabilities include some from runoff operations that
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