Travelers 2008 Annual Report Download - page 59

Item 1A. RISK FACTORS
You should carefully consider the following risks and all of the other information set forth in this
report, including our consolidated financial statements and the notes thereto.
Catastrophe losses could materially and adversely affect our results of operations, our financial
position and/or liquidity, and could adversely impact our ratings, our ability to raise capital and the
availability and cost of reinsurance. Our property and casualty insurance operations expose us to
claims arising out of catastrophes. Catastrophes can be caused by various natural events, including,
among others, hurricanes, windstorms, earthquakes, hail, severe winter weather, wildfires and volcanic
eruptions. Catastrophes can also be man-made, such as a terrorist attack (including those involving
nuclear, biological, chemical or radiological events) or a consequence of war or political instability. The
geographic distribution of our business subjects us to catastrophe exposures, which include, but are not
limited to: hurricanes from Maine through Texas; tornadoes throughout the central United States and
Southeast; earthquakes in California, the New Madrid region and the Pacific Northwest region of the
United States and Canada; and wildfires, particularly in the Southwest.
The incidence and severity of catastrophes are inherently unpredictable. Some scientists believe
that in recent years, changing climate conditions have added to the unpredictability and frequency of
natural disasters (including, but not limited to, hurricanes, tornadoes, other storms and fires) in certain
parts of the world and created additional uncertainty as to future trends and exposures. For example, in
recent years hurricane activity has impacted areas further inland than previously experienced, thus
expanding our overall hurricane exposure. It is possible that both the frequency and severity of natural
and man-made catastrophic events could increase. The catastrophe modeling tools that we use to help
manage certain of our catastrophe exposures are based on assumptions and judgments that are subject
to error and mis-estimation and may produce estimates that are materially different than actual results.
Our expansion into new geographical areas as well as changing climate conditions could cause our
catastrophe models to be even less predictive, thus limiting our ability to effectively manage such
exposures. See ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Catastrophe Modeling.’’
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. States have from time to time passed
legislation, and regulators have taken action, that has the effect of limiting the ability of insurers to
manage catastrophe risk, such as legislation prohibiting insurers from reducing exposures or
withdrawing from catastrophe-prone areas or mandating that insurers participate in residual markets.
Participation in residual market mechanisms has resulted in, and may continue to result in, significant
losses or assessments to insurers, including us, and, in certain states, those losses or assessments may
not be commensurate with our catastrophe exposure in those states. If our competitors leave those
states having residual market mechanisms, remaining insurers, including us, may be subject to
significant increases in losses or assessments following a catastrophe. In addition, following
catastrophes, there are sometimes legislative initiatives and court decisions which seek to expand
insurance coverage for catastrophe claims beyond the original intent of the policies. Also, our ability to
increase pricing to the extent necessary to offset rising costs of catastrophes, particularly in the Personal
Insurance segment, requires approval of regulatory authorities of certain states. Our ability or our
willingness to manage our catastrophe exposure by raising prices, modifying underwriting terms or
reducing exposure to certain geographies may be limited due to considerations of public policy, the
evolving political environment, changes in the general economic climate and/or social responsibilities.
We also may choose to write business in catastrophe-prone areas that we might not otherwise write for
strategic purposes, such as improving our access to other underwriting opportunities.
There are also risks that impact the estimation of ultimate costs for catastrophes. For example, the
estimation of reserves related to hurricanes can be affected by the inability to access portions of the
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