Travelers 2009 Annual Report Download - page 214

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. REINSURANCE (Continued)
claimant. In the event that the life insurance company fails to make the required annuity payments, the
Company would be required to make such payments.
The Company evaluates and monitors the financial condition of its reinsurers under voluntary
reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. In
addition, in the ordinary course of business, the Company may become involved in coverage disputes
with its reinsurers. Some of these disputes could result in lawsuits and arbitrations brought by or
against the reinsurers to determine the Company’s rights and obligations under the various reinsurance
agreements. The Company employs dedicated specialists and strategies to manage reinsurance
collections and disputes.
The Company is also required to participate in various involuntary reinsurance arrangements
through assumed reinsurance, principally with regard to residual market mechanisms in workers’
compensation and automobile insurance, as well as homeowners’ insurance in certain coastal areas. The
Company provides services for several of these involuntary arrangements (‘‘mandatory pools and
associations’’) under which it writes such residual market business directly, then cedes 100% of this
business to the mandatory pool. Such servicing arrangements are arranged to mitigate credit risk to the
Company, as any ceded balances are jointly backed by all the pool members.
The Company utilizes a general catastrophe reinsurance treaty with unaffiliated reinsurers to
manage its exposure to losses resulting from catastrophes. In addition to the coverage provided under
this treaty, the Company also utilizes catastrophe bond programs, as well as a Northeast catastrophe
reinsurance treaty, to protect against losses resulting from catastrophes in the Northeastern United
States.
Certain of the assumed reinsurance contracts that the Company has entered into with
non-affiliated companies on an excess of loss basis do not transfer insurance risk. These contracts,
which totaled $1 million and $46 million at December 31, 2009 and 2008, respectively, are accounted
for using deposit accounting and are included in other liabilities in the consolidated balance sheet.
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