Travelers 2010 Annual Report Download - page 36

industry. The data in the table is not accident year data, but rather a display of 2000 to 2010 year-end
reserves and the subsequent changes in those reserves.
For instance, the ‘‘cumulative deficiency (redundancy)’’ shown in the table for each year represents
the aggregate amount by which original estimates of reserves as of that year-end have changed in
subsequent years. Accordingly, the cumulative deficiency for a year relates only to reserves at that
year-end and those amounts are not additive. Expressed another way, if the original reserves at the end
of 2000 included $4 million for a loss that is finally paid in 2005 for $5 million, the $1 million
deficiency (the excess of the actual payment of $5 million over the original estimate of $4 million)
would be included in the cumulative deficiencies in each of the years 2000 to 2004 shown in the
accompanying table.
Various factors may distort the re-estimated reserves and cumulative deficiency or redundancy
shown in the table. For example, a substantial portion of the cumulative deficiencies shown in the table
arise from claims on policies written prior to the mid-1980s involving liability exposures such as
asbestos and environmental claims. In the post-1984 period, the Company has developed more stringent
underwriting standards and policy exclusions and has significantly contracted or terminated the writing
of these risks. See ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Asbestos Claims and Litigation,’’ and ‘‘—Environmental Claims and Litigation.’’
General conditions and trends that have affected the development of these liabilities in the past will
not necessarily recur in the future.
Other factors that affect the data in the table include the discounting of certain reserves (as
discussed above) and the use of retrospectively rated insurance policies. For example, reserves for
long-term disability and annuity claim payments (tabular reserves), primarily arising from workers’
compensation insurance and workers’ compensation excess insurance policies, are discounted to reflect
the time value of money. Apparent deficiencies will continue to occur as the discount on these workers’
compensation reserves is accreted at the appropriate interest rates. Also, a portion of National
Accounts business is underwritten with retrospectively rated insurance policies in which the ultimate
loss experience is primarily borne by the insured. For this business, increases in loss experience result in
an increase in reserves and an offsetting increase in amounts recoverable from insureds. Likewise,
decreases in loss experience result in a decrease in reserves and an offsetting decrease in amounts
recoverable from these insureds. The amounts recoverable on these retrospectively rated policies
mitigate the impact of the cumulative deficiencies or redundancies on the Company’s earnings but are
not reflected in the table.
Because of these and other factors, it is difficult to develop a meaningful extrapolation of
estimated future redundancies or deficiencies in loss reserves from the data in the table.
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