Travelers 2010 Annual Report Download - page 206

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. REINSURANCE (Continued)
Included in reinsurance recoverables are certain amounts related to structured settlements.
Structured settlements comprise annuities purchased from various life insurance companies to settle
certain personal physical injury claims, of which workers’ compensation claims comprise a significant
portion. In cases where the Company did not receive a release from the claimant, the structured
settlement is included in reinsurance recoverables as the Company retains the contingent liability to the
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. In
addition, 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 a catastrophe bond program and a Northeast catastrophe
reinsurance treaty to protect against losses resulting from catastrophes in the Northeastern United
States. The Company also utilizes an excess-of-loss treaty in its National Property business unit of the
Business Insurance segment to protect against earthquake losses up to a certain threshold.
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