Travelers 2011 Annual Report Download - page 145

claims are generally analyzed using the conventional methods described above. The reserves associated
with large claims are then analyzed utilizing various methods, such as:
• Estimating the number of large claims and their average values based on historical trends from
prior accident periods, adjusted for the current environment and supplemented with actual data
for the accident year analyzed to the extent available.
• Utilizing individual claim adjuster estimates of the large claims, combined with continual
monitoring of the aggregate accuracy of such claim adjuster estimates. (This monitoring may
lead to supplemental adjustments to the aggregate of such claim estimates.)
• Utilizing historic longer-term average ratios of large claims to small claims, and applying such
ratios to the estimated ultimate small claims from conventional analysis.
• Ground-up analysis of the underlying exposure (typically used for asbestos and environmental).
The results of such methodologies are subjected to various reasonability and diagnostic tests,
including paid-to-incurred loss ratios, implied incurred-loss-to-earned-premium ratios and non-zero
claim severity trends. An actual versus expected analysis is also performed comparing actual loss
development to expected development based on the prior review. Additional analyses may be
performed based on the results of these diagnostics, including the investigation of other actuarial
methods.
The methods described above are generally utilized to evaluate management’s existing estimate for
prior accident periods. For the initial estimate of the current accident year, the available claim data is
typically insufficient to produce a reliable indication. Hence, the initial estimate for an accident year is
generally based on a loss ratio projection method, which uses the earned premium for the current year
multiplied by a projected loss ratio. The projected loss ratio is determined through an analysis of prior
periods’ experience, using loss trend, rate level differences, mix of business changes and other known or
observed factors influencing the current accident year relative to prior accident years. The exact
number of prior accident years utilized varies by product line component, based on the volume of
business for that component and the reliability of an individual accident year estimate.
Management’s estimates
At least once per quarter, certain Company management meets with its actuaries to review the
latest claims and claim adjustment expense reserve analyses. Based on these analyses, management
determines whether its ultimate claim liability estimates should be changed. In doing so, it must
evaluate whether the new data provided represents credible actionable information or an anomaly that
will have no effect on estimated ultimate claim liability. For example, as described above, payments
may have decreased in one geographic region due to fewer claim adjusters being available to process
claims. The resulting claim payment patterns would be analyzed to determine whether or not the
change in payment pattern represents a change in ultimate claim liability.
Such an assessment requires considerable judgment. It is frequently not possible to determine
whether a change in the data is an anomaly until sometime after the event. Even if a change is
determined to be permanent, it is not always possible to reliably determine the extent of the change
until sometime later. The overall detailed analyses supporting such an effort can take several months to
perform. This is because the underlying causes of the trends observed need to be evaluated, which may
require the gathering or assembling of data not previously available. It may also include interviews with
experts involved with the underlying processes. As a result, there can be a time lag between the
emergence of a change and a determination that the change should be reflected in the Company’s
estimated claim liabilities. The final estimate selected by management in a reporting period is based on
these various detailed analyses of past data, adjusted to reflect any new actionable information.
The Audit Committee of the Board of Directors is responsible for providing oversight of reserving
propriety, and annually reviews the process by which the Company establishes reserves.
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