Travelers 2008 Annual Report Download - page 36

Operations’’) are affected by both internal and external events, such as changes in claims handling
procedures, inflation, judicial trends and legislative changes, among others. The impact of many of
these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Reserve
estimation difficulties also differ significantly by product line due to differences in the underlying
insurance contract (e.g., claims-made versus occurrence), claim complexity, the volume of claims, the
potential severity of individual claims, the determination of the occurrence date for a claim, and
reporting lags (the time between the occurrence of the insured event and when it is actually reported
to the insurer). Informed judgment is applied throughout the process.
The Company derives estimates for unreported claims and development on reported claims
principally from actuarial analyses of historical patterns of loss development by accident year for each
type of exposure and business unit. Similarly, the Company derives estimates of unpaid loss adjustment
expenses principally from actuarial analyses of historical development patterns of the relationship of
loss adjustment expenses to losses for each line of business and type of exposure. For a description of
the Company’s reserving methods for asbestos and environmental claims, see ‘‘Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and
Litigation,’’ and ‘‘—Environmental Claims and Litigation.’’
Discounting
Included in the claims and claim adjustment expense reserves in the consolidated balance sheet are
certain reserves discounted to the present value of estimated future payments. The liabilities for losses
for most long-term disability payments under workers’ compensation insurance and workers’
compensation excess insurance, which totaled $2.25 billion and $2.09 billion at December 31, 2008 and
2007, respectively, were discounted using a rate of 5% at December 31, 2008 and 2007. Reserves
totaling $33 million for certain assumed reinsurance business at December 31, 2007 were discounted
using a rate of 7%. No reserves for such assumed reinsurance business were discounted at
December 31, 2008.
Claims and Claim Adjustment Expense Development Table
The table that follows sets forth the year-end reserves from 1998 through 2008 and the subsequent
changes in those reserves, presented on a historical basis. The original estimates, cumulative amounts
paid and reestimated reserves in the table for the years 1998 through 2003 have not been restated to
reflect the acquisition of SPC in 2004. The table includes SPC reserves beginning at December 31,
2004.
In addition, the original estimates, cumulative amounts paid and reestimated reserves in the table
for the years 1998 to 2000 have not been restated to reflect the acquisition of Northland and
Commercial Guaranty Casualty. Beginning in 2001, the table includes the reserve activity of Northland
and Commercial Guaranty Casualty. The data in the table is presented in accordance with reporting
requirements of the Securities and Exchange Commission (SEC). Care must be taken to avoid
misinterpretation by those unfamiliar with this information or familiar with other data commonly
reported by the insurance industry. The data in the table is not accident year data, but rather a display
of 1998 to 2008 year-end reserves and the subsequent changes in those reserves.
For instance, the ‘‘cumulative deficiency (redundancy)’’ shown in the table for each year represents
the aggregate amount by which original estimates of reserves as of that year-end have changed in
subsequent years. Accordingly, the cumulative deficiency for a year relates only to reserves at that
year-end and those amounts are not additive. Expressed another way, if the original reserves at the end
of 1998 included $4 million for a loss that is finally paid in 2005 for $5 million, the $1 million
deficiency (the excess of the actual payment of $5 million over the original estimate of $4 million)
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