Travelers 2011 Annual Report Download - page 41

REGULATION
U.S. State and Federal Regulation
TRV’s insurance subsidiaries are subject to regulation in the various states and jurisdictions in
which they transact business. The extent of regulation varies, but generally derives from statutes that
delegate regulatory, supervisory and administrative authority to a department of insurance in each state.
The regulation, supervision and administration relate, among other things, to standards of solvency that
must be met and maintained, the licensing of insurers and their agents, the nature of and limitations on
investments, premium rates, restrictions on the size of risks that may be insured under a single policy,
reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for
the benefit of policyholders, approval of policy forms and the regulation of market conduct, including
the use of credit information in underwriting as well as other underwriting and claims practices. In
addition, many states have enacted variations of competitive ratemaking laws, which allow insurers to
set certain premium rates for certain classes of insurance without having to obtain the prior approval of
the state insurance department. State insurance departments also conduct periodic examinations of the
financial condition and market conduct of insurance companies and require the filing of financial and
other reports on a quarterly and annual basis. State insurance regulation continues to evolve in
response to the changing economic and business environment as well as efforts by regulators
internationally to develop a consistent approach to regulations. These changes are evidenced by the
recent changes that the states have made to provide greater emphasis on understanding an insurer’s
corporate governance and control environment, including enterprise risk management (ERM), in
conducting financial examinations. Additional requirements are also expected. For example, the
National Association of Insurance Commissioners (NAIC) is considering an Own Risk and Solvency
Assessment (ORSA) requirement, which if adopted by states would require insurers to perform an
ORSA and, upon request, file an ORSA report that describes for the regulators the ERM process used
by an insurer. See ‘‘Enterprise Risk Management’’ herein for further discussion of the Company’s
ERM. TRV’s insurance subsidiaries are collectively licensed to transact insurance business in all U.S.
states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.
Although the U.S. federal government has not historically regulated the insurance business, in 2010
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) established a
Federal Insurance Office within the U.S. Department of the Treasury. The Federal Insurance Office has
limited regulatory authority and is empowered to gather data and information regarding the insurance
industry and insurers, including conducting a study for submission to the U.S. Congress on how to
modernize and improve insurance regulation in the U.S. Further, the Dodd-Frank Act gives the Federal
Reserve supervisory authority over a number of nonbank financial services holding companies, including
insurance companies, if they are designated by a two-thirds vote of a Financial Stability Oversight
Council (the Council) as ‘‘systemically important financial institutions’’ (SIFI). While recent rules
proposed by the Council support the Company’s view that it will not be designated as a SIFI as defined
in the Dodd-Frank Act, it is possible that the Council may change its rules or interpretations in the
future and conclude that the Company is a SIFI. If the Company were designated as ‘‘systemically
important,’’ the Federal Reserve’s supervisory authority could include the ability to impose heightened
financial regulation and could impact requirements regarding the Company’s capital, liquidity and
leverage as well as its business and investment conduct. As a result of the foregoing, the Dodd-Frank
Act, or other additional state and federal regulation that is adopted in the future, could impose
significant burdens on the Company, including impacting the ways in which it conducts its business,
increasing compliance costs and duplicating state regulation, and could result in a competitive
disadvantage, particularly relative to smaller insurers that may not be subject to the same level of
regulation.
Insurance Regulation Concerning Dividends from Insurance Subsidiaries. TRV’s principal insurance
subsidiaries are domiciled in the state of Connecticut. The Connecticut insurance holding company laws
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