Travelers 2012 Annual Report Download - page 124

and Canadian exposures and include property exposures and workers’ compensation exposures. The
Company does not believe that the inclusion of hurricane or earthquake losses arising from other
geographical areas or other exposures would materially change the estimated threshold loss amounts.
Catastrophe modeling relies upon inputs based on experience, science, engineering and history.
These inputs reflect a significant amount of judgment and are subject to changes which may result in
volatility in the modeled output. Catastrophe modeling output may also fail to account for risks that
are outside the range of normal probability or are otherwise unforeseeable. Catastrophe modeling
assumptions include, among others, the portion of purchased reinsurance that is collectible after a
catastrophic event, which may prove to be materially incorrect. Consequently, catastrophe modeling
estimates are subject to significant uncertainty. In the tables above, the uncertainty associated with the
estimated threshold loss amounts increases significantly as the likelihood of exceedance decreases. In
other words, in the case of a relatively more remote event (e.g., 1-in-1,000), the estimated threshold
loss amount is relatively less reliable. Actual losses from an event could materially exceed the indicated
threshold loss amount. In addition, more than one such event could occur in any period.
Moreover, the Company is exposed to the risk of material losses from other than property and
workers’ compensation coverages arising out of hurricanes and earthquakes, and it is exposed to
catastrophe losses from perils other than hurricanes and earthquakes, such as tornadoes and other
windstorms, hail, wildfires, severe winter weather, floods, volcanic eruptions, tsunamis and acts of
terrorism.
For more information about the Company’s exposure to catastrophe losses, see ‘‘Item 1A—Risk
Factors—Catastrophe losses could materially and adversely affect our results of operations, our
financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital
and the availability and cost of reinsurance’’ and ‘‘Item 1A—Risk Factors—We may be adversely
affected if our pricing and capital models provide materially different indications than actual results.’’
CHANGING CLIMATE CONDITIONS
Severe weather events over the last several years have underscored the unpredictability of future
climate trends and created uncertainty regarding insurers’ exposures to financial loss as a result of
catastrophes and other weather-related events. Some scientists believe that, in recent years, changing
climate conditions have added to the unpredictability, frequency and severity of natural disasters. For
example, in recent years hurricane activity has impacted areas further inland than previously
experienced, thus expanding the Company’s potential for losses from hurricanes. Additionally, both the
frequency and severity of tornado and hail storms in the United States have been greater in recent
years. Further, any reduction in arctic sea ice may contribute to rising sea levels that could impact
flooding in coastal areas. Accordingly, if climate conditions are changing, the Company may be subject
to increased losses from catastrophes and other weather-related events. Additionally, the Company’s
catastrophe models may be less reliable due to the increased unpredictability, frequency and severity of
severe weather events.
The Company discusses how potentially changing climate conditions may present other issues for
its business under ‘‘Risk Factors’’ in Item 1A of this report and under ‘‘—Outlook’’ herein. For
example, among other things:
• Increasingly unpredictable and severe weather conditions could result in increased frequency and
severity of claims under policies issued by the Company. See ‘‘Risk Factors—Catastrophe losses
could materially and adversely affect our results of operations, our financial position and/or
liquidity, and could adversely impact our ratings, our ability to raise capital and the availability
and cost of reinsurance’’ and ‘‘—Outlook—Underwriting Gain/Loss.’’
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