Travelers 2011 Annual Report Download - page 60

those states. If our competitors leave those states having residual market mechanisms, remaining
insurers, including us, may be subject to significant increases in losses or assessments following a
catastrophe. In addition, following catastrophes, there are sometimes legislative and administrative
initiatives and court decisions that seek to expand insurance coverage for catastrophe claims beyond the
original intent of the policies or seek to prevent the application of deductibles. Also, our ability to
adjust terms, including deductible levels, or to increase pricing to the extent necessary to offset rising
costs of catastrophes, particularly in the Personal Insurance segment, requires approval of regulatory
authorities of certain states. Our ability or our willingness to manage our catastrophe exposure by
raising prices, modifying underwriting terms or reducing exposure to certain geographies may be limited
due to considerations of public policy, the evolving political environment, changes in the general
economic climate and/or social responsibilities. We also may choose to write business in catastrophe-
prone areas that we might not otherwise write for strategic purposes, such as improving our access to
other underwriting activities.
There are also risks that impact the estimation of ultimate costs for catastrophes. For example, the
estimation of reserves related to hurricanes can be affected by the inability 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; business interruption costs;
and reinsurance collectability. 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 and additional
information becomes available.
Exposure to catastrophe losses or actual losses resulting from a catastrophe could adversely affect
our financial strength and claims-paying ratings and could impair our ability to raise capital on
acceptable terms or at all. Also, as a result of our exposure to catastrophe losses or actual losses
following a catastrophe, rating agencies may further increase capital requirements, which may require
us to raise capital to maintain our ratings or adversely affect our ratings. A ratings downgrade could
hurt our ability to compete effectively or attract new business. In addition, catastrophic events could
cause us to exhaust our available reinsurance limits and could adversely impact the cost and availability
of reinsurance. Such events can also impact the credit of our reinsurers. For a discussion of our
catastrophe reinsurance coverage, see ‘‘Item 1—Business—Reinsurance—Catastrophe Reinsurance.’’
Catastrophic events could also adversely impact the credit of the issuers of securities, such as states or
municipalities, in whom we have invested.
In addition, coverage in our reinsurance program for terrorism is limited. Although the Terrorism
Risk Insurance Program (the Program) provides benefits in the event of certain acts of terrorism, those
benefits are subject to a deductible and other limitations. Under this Program, once our losses exceed
20% of our commercial property and casualty insurance premium for the preceding calendar year, the
federal government will reimburse us for 85% of our losses attributable to certain acts of terrorism
which exceed this deductible up to a total industry program cap of $100 billion. Our estimated
deductible under the program is $2.17 billion for 2012. In addition, because the interpretation of this
law is untested, there is substantial uncertainty as to how it will be applied to specific circumstances. It
is also possible that future legislative action could change the Program. The Program is due to expire at
the end of 2014, unless extended.
Because of the risks set forth above, catastrophes such as those caused by various natural events or
man-made events such as a terrorist attack, including ‘‘unconventional’’ acts of terrorism involving
nuclear, biological, chemical or radiological events, could materially and adversely affect our results of
operations, financial position and/or liquidity. Further, while we seek to manage our exposure to
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