Travelers 2010 Annual Report Download - page 149

insured’s assets. Certain classes of surety claims are very high severity, low frequency in nature. These
can include large construction contractors involved with one or multiple large, complex projects as well
as certain large commercial surety exposures. Other claim factors affecting reserve variability of surety
include litigation related to amounts owed by and due the insured (e.g., salvage and subrogation
efforts) and the results of financial restructuring of an insured.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required fidelity and surety reserves (beyond those included in the general discussion section) include:
Fidelity risk factors
Type of business of insured
Policy limit and attachment points
Third-party claims
Coverage litigation
Complexity of claims
Growth in insureds’ operations
Surety risk factors
Economic trends, including the general level of construction activity
Concentration of reserves in a relatively few large claims
Type of business insured
Type of obligation insured
Cumulative limits of liability for insured
Assets available to mitigate loss
Defective workmanship/latent defects
Financial strategy of insured
Changes in statutory obligations
Geographic spread of business
Fidelity and Surety book of business risk factors
Changes in policy provisions (e.g., deductibles, limits, endorsements)
Changes in underwriting standards
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 fidelity and surety, a 1% increase
(decrease) in incremental paid loss development for each future calendar year could result in a 1.3%
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 138% (averaging 19%) for the Company, and from 13% to 24%
(averaging 6%) for the industry overall. The Company’s year-to-year changes are driven by, and are
based on, observed events during the year. Because the high end of the Company’s range was due to
acquired business in 2004, the Company believes that the industry’s range of historical outcomes is
illustrative of reasonably possible one-year changes in reserve estimates for this product line. Fidelity
and surety reserves represent approximately 3% of the Company’s total loss reserves.
In general, developments on single large claims (both adverse and favorable) are a primary source
of changes in reserve estimates for this product line.
The Company’s change in reserve estimate for this product line was 6% for 2010, 7% for 2009
and 10% for 2008. The 2010 change was driven by better than expected loss development due to
lower than expected claim activity and loss severity, primarily for the contract surety business in this
product line for the 2008 and prior accident years. The 2009 and 2008 changes were a result of better
than expected loss development for the contract surety business within this product line, primarily
driven by favorable settlements on large claims from older accident years.
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