Travelers 2009 Annual Report Download - page 19

Marine, Excess Casualty, Boiler & Machinery, and Global Accounts, which are described in more detail
earlier in this report.
Specialized Distribution distributes admitted and excess and surplus lines property and casualty
products predominantly through selected wholesale agents, both on a brokerage and managing general
underwriting basis, and through selected program agents. Brokers, general agents and program agents
operate in certain markets that are not typically served by the Company’s appointed retail agents, or
they maintain certain affinity arrangements in specialized market segments. The wholesale excess and
surplus lines market, which is characterized by the absence of rate and form regulation, allows for more
flexibility to write certain classes of business. In working with wholesale or program agents on a
brokerage basis, Specialized Distribution underwrites the business and sets the premium level. In
working with wholesale or program agents on a managing general underwriting or program manager
basis, the agents produce and underwrite business subject to underwriting guidelines that have been
specifically designed for each facility or program.
Pricing and Underwriting
Business Insurance has developed an underwriting and pricing methodology that incorporates
underwriting, claims, engineering, actuarial and product development disciplines for particular
industries. This approach is designed to maintain high quality underwriting and pricing discipline. It
utilizes proprietary data gathered and analyzed with respect to its Business Insurance business over
many years. The underwriters and engineers use this information to assess and evaluate risks prior to
quotation. This information provides specialized knowledge about specific industry segments. This
methodology enables Business Insurance to streamline its risk selection process and develop pricing
parameters that will not compromise its underwriting integrity.
For smaller businesses meeting pre-determined exposure characteristics and thresholds, Select
Accounts utilizes an automated underwriting system that enables agents to issue a significant number of
policies at their desktop.
A portion of business in this segment, particularly in National Accounts and Construction, is
written with large deductible insurance policies. Under workers’ compensation insurance contracts with
deductible features, the Company is obligated to pay the claimant the full amount of the claim. The
Company is subsequently reimbursed by the contractholder for the deductible amount and is subject to
credit risk until such reimbursement is made. At December 31, 2009, contractholder receivables and
payables on unpaid losses associated with large deductible policies were each approximately
$5.79 billion. Retrospectively rated policies are also used for workers’ compensation coverage. Although
the retrospectively rated feature of the policy substantially reduces insurance risk for the Company, it
introduces additional credit risk to the Company. Premium receivables from holders of retrospectively
rated policies totaled approximately $491 million at December 31, 2009. Significant collateral, primarily
letters of credit and, to a lesser extent, cash collateral, trusts or surety bonds, is generally requested for
large deductible plans and/or retrospectively rated policies that provide for deferred collection of
deductible recoveries and/or ultimate premiums. The amount of collateral requested is predicated upon
the creditworthiness of the customer and the nature of the insured risks. Business Insurance continually
monitors the credit exposure on individual accounts and the adequacy of collateral.
Product Lines
Commercial Multi-Peril provides a combination of property and liability coverage. Property
insurance covers damages such as those caused by fire, wind, hail, earthquake, water, theft, vandalism
and terrorism, and protects businesses from financial loss due to business interruption resulting from a
covered loss. Liability coverage insures businesses against third party claims arising from accidents
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