Travelers 2011 Annual Report Download - page 221

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INSURANCE CLAIM RESERVES (Continued)
terrorist attack (including those involving nuclear, biological, chemical or radiological events),
explosions, infrastructure failures or as a consequence of political instability. The incidence and severity
of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of
both the total amount of insured exposure in the area affected by the event and the severity of the
event. Most catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes
may produce significant damage in larger areas, especially those that are heavily populated. The
Company generally seeks to mitigate its exposure to catastrophes through individual risk selection and
the purchase of catastrophe reinsurance.
There are also risks which impact the estimation of ultimate costs for catastrophes. For example,
the estimation of reserves related to hurricanes can be affected by the inability of the Company and its
insureds to access portions of the impacted areas, the complexity of factors contributing to the losses,
the legal and regulatory uncertainties and the nature of the information available to establish the
reserves. Complex factors include, but are not limited to: determining whether damage was caused by
flooding versus wind; evaluating general liability and pollution exposures; estimating additional living
expenses; the impact of demand surge; infrastructure disruption; fraud; the effect of mold damage and
business income interruption costs; and reinsurance collectibility. The timing of a catastrophe’s
occurrence, such as at or near the end of a reporting period, can also affect the information available
to us in estimating reserves for that reporting period. The estimates related to catastrophes are
adjusted as actual claims emerge.
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