Travelers 2011 Annual Report Download - page 149

Property reserves are typically analyzed in two components, one for catastrophic or other large
single events, and another for all other events. Examples of common risk factors, or perceptions
thereof, that could change and, thus, affect the required property reserves (beyond those included in
the general discussion section) include:
Property risk factors
• Physical concentration of policyholders
• Availability and cost of local contractors
• For the more severe catastrophic events, ‘‘demand surge’’ inflation, which refers to significant
short-term increases in building material and labor costs due to a sharp increase in demand for
those materials and services
• Local building codes
• Amount of time to return property to full usage (for business interruption claims)
• Frequency of claim re-openings on claims previously closed
• Court interpretation of policy provisions (such as occurrence definition, or wind versus flooding)
• Lags in reporting claims (e.g., winter damage to summer homes, hidden damage after an
earthquake, hail damage to roofs and/or equipment on roofs)
• Court or legislative changes to the statute of limitations
Property book of business risk factors
• Policy provisions mix (e.g., deductibles, policy 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 property, a 1% increase (decrease) in
incremental paid loss development for each future calendar year could result in a 1.1% increase
(decrease) in claims and claim adjustment expense reserves.
Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 34% to 26% (averaging 13%) for the Company, and from 14% to 7%
(averaging 7%) 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 of historical
adverse development comes from certain businesses that the Company has since exited, 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. Property reserves represent approximately 3% of the
Company’s total claims and claim adjustment expense reserves.
Since property is considered a short tail coverage, the one year change for property can be more
volatile than that for the longer tail product lines. This is due to the fact that the majority of the
reserve for property relates to the most recent accident year, which is subject to the most uncertainty
for all product lines. This recent accident year uncertainty is relevant to property because of weather
related events which, notwithstanding 2010 and 2011 experience, tend to be concentrated in the second
half of the year, and generally are not completely resolved until the following year. Reserve estimates
associated with major catastrophes may take even longer to resolve. The reserve estimates for this
product line are also potentially subject to material changes due to uncertainty in measuring ultimate
losses for unprecedented significant catastrophes such as the events of September 11, 2001 and
Hurricane Katrina.
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