Travelers 2012 Annual Report Download - page 141

(including asbestos and environmental claims), partially offset by the increase in loss cost trends and
catastrophe losses incurred in 2012.
Asbestos and environmental reserves are included in the General liability, Commercial multi-peril
and International and other lines in the foregoing summary table. Asbestos and environmental reserves
are discussed separately; see ‘‘Asbestos Claims and Litigation’’, ‘‘Environmental Claims and Litigation’’
and ‘‘Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.’’
Claims and claim adjustment expense reserves represent management’s estimate of ultimate unpaid
costs of losses and loss adjustment expenses for claims that have been reported and claims that have
been incurred but not yet reported (IBNR). Claims and claim adjustment expense reserves do not
represent an exact calculation of liability, but instead represent management estimates, generally
utilizing actuarial expertise and projection techniques, at a given accounting date. These estimates are
expectations of what the ultimate settlement and administration of claims will cost upon final resolution
in the future, based on the Company’s assessment of facts and circumstances then known, review of
historical settlement patterns, estimates of trends in claims severity and frequency, expected
interpretations of legal theories of liability and other factors. In establishing gross claims and claim
adjustment expense reserves, the Company also considers salvage and subrogation. Estimated recoveries
from reinsurance are included in ‘‘Reinsurance Recoverables’’ as an asset on the Company’s
consolidated balance sheet. The claims and claim adjustment expense reserves are reviewed regularly by
qualified actuaries employed by the Company.
The process of estimating claims and claim adjustment expense reserves involves a high degree of
judgment and is subject to a number of variables. These variables can be affected by both internal and
external events, such as changes in claims handling procedures, changes in individuals involved in the
reserve estimation process, economic inflation, legal trends and legislative changes, among others. The
impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to
estimate. Estimation difficulties also differ significantly by product line due to differences in claim
complexity, the volume of claims, the potential severity of individual claims, the determination of
occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder
event and when it is actually reported to the insurer). Informed judgment is applied throughout the
process, including the application of various individual experiences and expertise to multiple sets of
data and analyses. The Company continually refines its estimates in a regular ongoing process as
historical loss experience develops and additional claims are reported and settled. The Company
rigorously attempts to consider all significant facts and circumstances known at the time claims and
claim adjustment expense reserves are established. Due to the inherent uncertainty underlying these
estimates including, but not limited to, the future settlement environment, final resolution of the
estimated liability for claims and claim adjustment expenses may be higher or lower than the related
claims and claim adjustment expense reserves at the reporting date. Therefore, actual paid losses, as
claims are settled in the future, may be materially different than the amount currently recorded—
favorable or unfavorable.
Because establishment of claims and claim adjustment expense reserves is an inherently uncertain
process involving estimates, currently established claims and claim adjustment expense reserves may
change. The Company reflects adjustments to the reserves in the results of operations in the period the
estimates are changed.
There are also additional risks which impact the estimation of ultimate costs for catastrophes. For
example, the estimation of reserves related to hurricanes, tornadoes and other catastrophic events 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
129