Travelers 2009 Annual Report Download - page 36

be no assurance that the Company would have sufficient resources to respond to claims arising out of
one or more man-made catastrophic events involving so-called weapons of mass destruction, including
nuclear, biological, chemical or radiological means.
CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES
Claims and claim adjustment expense reserves (loss reserves) represent management’s estimate of
ultimate unpaid costs of losses and loss adjustment expenses for claims that have been reported and
claims that have been incurred but not yet reported.
The Company continually refines its reserve estimates in a regular ongoing process that includes
review of key assumptions, underlying variables and historical loss experience. The Company reflects
adjustments to reserves in the results of operations in the periods in which the estimates are changed.
In establishing reserves, the Company takes into account estimated recoveries for reinsurance, salvage
and subrogation. The reserves are also reviewed regularly by qualified actuaries employed by the
Company. For additional information on the process of estimating reserves and a discussion of
underlying variables and risk factors, see ‘‘Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting Estimates.’’
The process of estimating loss reserves involves a high degree of judgment and is subject to a
number of variables. These variables (discussed by product line in the ‘‘Critical Accounting Estimates’’
section of ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of
Operations’’) are affected by both internal and external events, such as changes in claims handling
procedures, inflation, judicial trends and legislative changes, among others. The impact of many of
these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Reserve
estimation difficulties also differ significantly by product line due to differences in the underlying
insurance contract (e.g., claims-made versus occurrence), claim complexity, the volume of claims, the
potential severity of individual claims, the determination of the occurrence date for a claim, and
reporting lags (the time between the occurrence of the insured event and when it is actually reported
to the insurer). Informed judgment is applied throughout the process.
The Company derives estimates for unreported claims and development on reported claims
principally from actuarial analyses of historical patterns of loss development by accident year for each
type of exposure and business unit. Similarly, the Company derives estimates of unpaid loss adjustment
expenses principally from actuarial analyses of historical development patterns of the relationship of
loss adjustment expenses to losses for each line of business and type of exposure. For a description of
the Company’s reserving methods for asbestos and environmental claims, see ‘‘Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and
Litigation,’’ and ‘‘—Environmental Claims and Litigation.’’
Discounting
The claims and claim adjustment expense reserves for most long-term disability payments under
workers’ compensation insurance and workers’ compensation excess insurance, which totaled
$2.16 billion and $2.25 billion at December 31, 2009 and 2008, respectively, were discounted to the
present value of estimated future payments using a rate of 5% at both December 31, 2009 and 2008.
Claims and Claim Adjustment Expense Development Table
The table that follows sets forth the year-end reserves from 1999 through 2009 and the subsequent
changes in those reserves, presented on a historical basis. The original estimates, cumulative amounts
paid and re-estimated reserves in the table for the years 1999 through 2003 have not been restated to
reflect the acquisition of The St. Paul Companies, Inc. (SPC) in 2004. The table includes SPC reserves
beginning at December 31, 2004.
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