Travelers 2009 Annual Report Download - page 32

applicable regulatory and/or court authority. For additional information concerning reinsurance, see
note 5 of notes to the Company’s consolidated financial statements and ‘‘Item 1A—Risk Factors.’’
The Company utilizes a variety of reinsurance agreements to manage its exposure to large property
and casualty losses, including:
• facultative reinsurance, in which reinsurance is provided for all or a portion of the insurance
provided by a single policy and each policy reinsured is separately negotiated;
• treaty reinsurance, in which reinsurance is provided for a specified type or category of risks; and
• catastrophe reinsurance, in which the Company is indemnified for an amount of loss in excess of
a specified retention with respect to losses resulting from a catastrophic event.
For a description of reinsurance-related litigation, see ‘‘Item 3—Legal Proceedings.’’
Catastrophe Reinsurance
Catastrophes can be caused by various natural events including, among others, hurricanes,
earthquakes, windstorms, hail, wildfires, severe winter weather, floods 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 political instability. The incidence and
severity of catastrophes are inherently unpredictable. 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. Most catastrophes are restricted to small geographic areas; however, hurricanes and
earthquakes may produce significant damage in larger areas, especially those areas that are heavily
populated. The Company generally seeks to manage its exposure to catastrophes through individual risk
selection and the purchase of catastrophe reinsurance. 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 a
catastrophe bond program, as well as a Northeast catastrophe reinsurance treaty, to protect against
certain losses resulting from catastrophes in the Northeastern United States.
General Catastrophe Reinsurance Treaty. The general catastrophe reinsurance treaty covers the
accumulation of net property losses arising out of one occurrence. The treaty only provides coverage
for terrorism events in limited circumstances and excludes entirely losses arising from nuclear,
biological, chemical or radiological attacks. The treaty covers all of the Company’s exposures in the
United States and Canada and their possessions and waters contiguous thereto, the Caribbean and
Mexico. For business underwritten in Canada, the United Kingdom, Republic of Ireland and in the
Company’s operations at Lloyd’s, separate reinsurance protections are purchased locally that have lower
net retentions more commensurate with the size of the respective local balance sheet. The Company
conducts an ongoing review of its risk and catastrophe coverages and makes changes as it deems
appropriate.
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