Travelers 2009 Annual Report Download - page 149

4%) for the Company and from 5% to 7% (averaging 1%) for the industry overall. The Company’s
year-to-year changes are driven by, and are based on, observed events during the year. Because the
high end of the Company’s range of historical adverse development comes from certain businesses that
the Company has since exited, the Company believes that the industry’s range of historical outcomes is
illustrative of reasonably possible one-year changes in reserve estimates for this product line. General
liability reserves (excluding asbestos and environmental) represent approximately 28% of the
Company’s total loss reserves.
The Company’s change in reserve estimate for this product line, excluding estimated asbestos and
environmental amounts, was 5% for 2009, 5% for 2008 and 2% for 2007. The 2009 and 2008
changes primarily reflected significant favorable prior year reserve development, driven by several
factors, including improved legal and judicial environments, as well as enhanced risk control,
underwriting and claim process initiatives. The 2007 change was driven by better than expected loss
development for recent accident years attributable to several factors, including improved legal and
judicial environments, as well as enhanced risk control, underwriting and claim process initiatives.
Property
Property is generally considered a short tail line with a simpler and faster claim reporting and
adjustment process than liability coverages, and less uncertainty in the reserve setting process (except
for more complex business interruption claims). It is generally viewed as a moderate frequency, low to
moderate severity line, except for catastrophes and coverage related to large properties. The claim
reporting and settlement process for property coverage claim reserves is generally restricted to the
insured and the insurer. Overall, the claim liabilities for this line create a low estimation risk, except
possibly for catastrophes and business interruption claims.
Property reserves are typically analyzed in two components, one for catastrophic or other large
single events, and another for all other events. Examples of common risk factors, or perceptions
thereof, that could change and, thus, affect the required property reserves (beyond those included in
the general discussion section) include:
Property risk factors
Physical concentration of policyholders
Availability and cost of local contractors
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
Local building codes
Amount of time to return property to full usage (for business interruption claims)
Court interpretation of policy provisions (such as occurrence definition, or wind versus flooding)
Lags in reporting claims (e.g., winter damage to summer homes, hidden damage after an earthquake)
Court or legislative changes to the statute of limitations
Property book of business risk factors
Policy provisions mix (e.g., deductibles, policy limits, endorsements)
Changes in underwriting standards
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 property, 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 34% to 26% (averaging 7%) for the Company, and from 14% to 7%
137