Travelers 2009 Annual Report Download - page 152

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 commercial automobile, a 1% increase
(decrease) in incremental paid loss development for each future calendar year could result in a 1.2%
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 10% to 9% (averaging 2%) for the Company, and from 3% to 9%
(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.
Commercial automobile reserves represent approximately 7% of the Company’s total loss reserves.
The Company’s change in reserve estimate for this product line was 6% for 2009,-7% for 2008
and 10% for 2007. The 2009 and 2008 changes were a result of better than expected loss
development, primarily for recent accident years, which was attributable to several factors, including
improved legal and judicial environments, and enhanced risk control, underwriting and claim process
initiatives. The 2007 change was due to better than expected loss development, for recent accident
years, as a result of more favorable legal and judicial environments, claim handling initiatives and, the
Company believes, improvements in auto safety technology.
Workers’ Compensation
Workers’ compensation is generally considered a long tail coverage, as it takes a relatively long
period of time to finalize claims from a given accident year. While certain payments such as initial
medical treatment or temporary wage replacement for the injured worker are made quickly, some other
payments are made over the course of several years, such as awards for permanent partial injuries. In
addition, some payments can run as long as the injured worker’s life, such as permanent disability
benefits and on-going medical care. Despite the possibility of long payment tails, the reporting lags are
generally short, settlements are generally not complex, and most of the liability can be considered high
frequency with moderate severity. The largest reserve risk generally comes from the low frequency, high
severity claims providing lifetime coverage for medical expense arising from a worker’s injury. Overall,
the claim liabilities for this line create a somewhat greater than moderate estimation risk.
Workers’ compensation reserves are typically analyzed in three components: indemnity losses,
medical losses and claim adjustment expenses.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required workers’ compensation reserves (beyond those included in the general discussion section)
include:
Indemnity risk factors
Time required to recover from the injury
Degree of available transitional jobs
Degree of legal involvement
Changes in the interpretations and processes of the workers’ compensation commissions’ oversight of
claims(1)
Future wage inflation for states that index benefits
Changes in the administrative policies of second injury funds
(1) These are administrative bodies that evaluate whether or not a given claim for workers’
compensation benefits is valid. Their duties include the determination of whether a given injury
arose out of the scope of employment or the determination of the degree of injury where disputes
exist.
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