Travelers 2011 Annual Report Download - page 142

Company’s future operating results. See the preceding discussion of ‘‘Asbestos Claims and Litigation’’
and ‘‘Environmental Claims and Litigation.’’
General Discussion
The process for estimating the liabilities for claims and claim adjustment expenses begins with the
collection and analysis of claim data. Data on individual reported claims, both current and historical,
including paid amounts and individual claim adjuster estimates, are grouped by common characteristics
(components) and evaluated by actuaries in their analyses of ultimate claim liabilities by product line.
Such data is occasionally supplemented with external data as available and when appropriate. The
process of analyzing reserves for a component is undertaken on a regular basis, generally quarterly, in
light of continually updated information.
Multiple estimation methods are available for the analysis of ultimate claim liabilities. Each
estimation method has its own set of assumption variables and its own advantages and disadvantages,
with no single estimation method being better than the others in all situations and no one set of
assumption variables being meaningful for all product line components. The relative strengths and
weaknesses of the particular estimation methods when applied to a particular group of claims can also
change over time. Therefore, the actual choice of estimation method(s) can change with each
evaluation. The estimation method(s) chosen are those that are believed to produce the most reliable
indication at that particular evaluation date for the claim liabilities being evaluated.
In most cases, multiple estimation methods will be valid for the particular facts and circumstances
of the claim liabilities being evaluated. This will result in a range of reasonable estimates for any
particular claim liability. The Company uses such range analyses to back test whether previously
established estimates for reserves at the reporting segments are reasonable, given subsequent
information. Reported values found to be closer to the endpoints of a range of reasonable estimates
are subject to further detailed reviews. These reviews may substantiate the validity of management’s
recorded estimate or lead to a change in the reported estimate.
The exact boundary points of these ranges are more qualitative than quantitative in nature, as no
clear line of demarcation exists to determine when the set of underlying assumptions for an estimation
method switches from being reasonable to unreasonable. As a result, the Company does not believe
that the endpoints of these ranges are or would be comparable across companies. In addition, potential
interactions among the different estimation assumptions for different product lines make the
aggregation of individual ranges a highly judgmental and inexact process.
Property-casualty insurance policies are either written on a claims-made or on an occurrence basis.
Claims-made policies generally cover, subject to requirements in individual policies, claims reported
during the policy period. Policies that are written on an occurrence basis require that the insured
demonstrate that a loss occurred in the policy period, even if the insured reports the loss many years
later.
Most general liability policies are written on an occurrence basis. These policies are subject to
substantial loss development over time as facts and circumstances change in the years following the
policy issuance. The occurrence form, which accounts for much of the reserve development in asbestos
and environmental exposures, is also used to provide coverage for construction general liability,
including construction defect. Occurrence-based forms of insurance for general liability exposures
require substantial projection of various trends, including future inflation and judicial interpretations
and societal litigation dynamics, among others.
A basic premise in most actuarial analyses is that past patterns demonstrated in the data will
repeat themselves in the future, absent a material change in the associated risk factors discussed below.
To the extent a material change affecting the ultimate claim liability is known, such change is quantified
to the extent possible through an analysis of internal company data and, if available and when
appropriate, external data. Such a measurement is specific to the facts and circumstances of the
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