Travelers 2008 Annual Report Download - page 33

The Company utilizes a variety of reinsurance agreements to manage its exposure to large property
and casualty losses, including:
• facultative reinsurance, in which reinsurance is provided for all or a portion of the insurance
provided by a single policy and each policy reinsured is separately negotiated;
• treaty reinsurance, in which reinsurance is provided for a specified type or category of risks; and
• catastrophe reinsurance, in which the Company is indemnified for an amount of loss in excess of
a specified retention with respect to losses resulting from a catastrophic event.
For a description of reinsurance-related litigation, see ‘‘Item 3—Legal Proceedings.’’
Catastrophe Reinsurance
Catastrophes can be caused by various natural and man-made events including hurricanes,
windstorms, earthquakes, hail, severe winter weather, explosions and fires. The incidence and severity
of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of
both the total amount of insured exposure in the area affected by the event and the severity of the
event. Most catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes
may produce significant damage in larger areas, especially those areas that are heavily populated. The
Company generally seeks to manage its exposure to catastrophes through individual risk selection and
the purchase of catastrophe reinsurance. The Company utilizes a general catastrophe reinsurance treaty
with unaffiliated reinsurers to manage its exposure to losses resulting from catastrophes. In addition to
the coverage provided under this treaty, the Company also utilizes a catastrophe bond program, as well
as a Northeast catastrophe reinsurance treaty, to protect against losses resulting from catastrophes in
the Northeastern United States.
General Catastrophe Reinsurance Treaty. The general catastrophe reinsurance treaty covers the
accumulation of net property losses arising out of one occurrence. The treaty only provides coverage
for terrorism events in limited circumstances and excludes entirely losses arising from nuclear,
biological, chemical or radiological attacks. The treaty covers all of the Company’s exposures in the
United States and Canada and their possessions and waters contiguous thereto, the Caribbean and
Mexico. For business underwritten in Canada, the United Kingdom, Republic of Ireland and in the
Company’s operations at Lloyd’s, separate reinsurance protections are purchased locally that have lower
net retentions more commensurate with the size of the respective local balance sheet. The Company
conducts an ongoing review of its risk and catastrophe coverages and makes changes as it deems
appropriate.
The following table summarizes the Company’s coverage under its General Catastrophe Treaty,
effective for the period July 1, 2008 through June 30, 2009:
Layer of Loss Reinsurance Coverage In-Force
$0 - $1.0 billion ............ Loss 100% retained by the Company
$1.0 billion - $1.5 billion ...... 20.0% ($100 million) of loss covered by treaty;
80.0% ($400 million) of loss retained by Company
$1.5 billion - $2.25 billion ..... 56.7% ($425 million) of loss covered by Treaty;
43.3% ($325 million) of loss retained by Company
Greater than $2.25 billion ..... 100% of loss retained by Company, except for certain
losses incurred in the Northeastern United States, which
are covered by the Catastrophe Bond Program and
Northeast Catastrophe Treaty as described below.
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