Travelers 2012 Annual Report Download - page 143

demonstrate that a loss occurred in the policy period, even if the insured reports the loss many years
later.
Most general liability policies are written on an occurrence basis. These policies are subject to
substantial loss development over time as facts and circumstances change in the years following the
policy issuance. The occurrence form, which accounts for much of the reserve development in asbestos
and environmental exposures, is also used to provide coverage for construction general liability,
including construction defect. Occurrence-based forms of insurance for general liability exposures
require substantial projection of various trends, including future inflation, judicial interpretations and
societal litigation trends (e.g., size of jury awards and propensity of individuals to pursue litigation),
among others.
A basic premise in most actuarial analyses is that past patterns demonstrated in the data will
repeat themselves in the future, absent a material change in the associated risk factors discussed below.
To the extent a material change affecting the ultimate claim liability is known, such change is quantified
to the extent possible through an analysis of internal company data and, if available and when
appropriate, external data. Such a measurement is specific to the facts and circumstances of the
particular claim portfolio and the known change being evaluated. Significant structural changes to the
available data, product mix or organization can materially impact the reserve estimation process.
Informed judgment is applied throughout the reserving process. This includes the application of
various individual experiences and expertise to multiple sets of data and analyses. In addition to
actuaries, experts involved with the reserving process also include underwriting and claims personnel
and lawyers, as well as other company management. Therefore, management may have to consider
varying individual viewpoints as part of its estimation of claims and claim adjustment expense reserves.
It is also likely that during periods of significant change, such as a merger, consistent application of
informed judgment becomes even more complicated and difficult.
The variables discussed above in this general discussion have different impacts on reserve
estimation uncertainty for a given product line, depending on the length of the claim tail, the reporting
lag, the impact of individual claims and the complexity of the claim process for a given product line.
Product lines are generally classifiable as either long tail or short tail, based on the average length
of time between the event triggering claims under a policy and the final resolution of those claims.
Short tail claims are reported and settled quickly, resulting in less estimation variability. The longer the
time before final claim resolution, the greater the exposure to estimation risks and hence the greater
the estimation uncertainty.
A major component of the claim tail is the reporting lag. The reporting lag, which is the time
between the event triggering a claim and the reporting of the claim to the insurer, makes estimating
IBNR inherently more uncertain. In addition, the greater the reporting lag, the greater the proportion
of IBNR to the total claim liability for the product line. Writing new products with material reporting
lags can result in adding several years’ worth of IBNR claim exposure before the reporting lag exposure
becomes clearly observable, thereby increasing the risk associated with pricing and reserving such
products. The most extreme example of claim liabilities with long reporting lags are asbestos claims.
For some lines, the impact of large individual claims can be material to the analysis. These lines
are generally referred to as being ‘‘low frequency/high severity,’’ while lines without this ‘‘large claim’’
sensitivity are referred to as ‘‘high frequency/low severity.’’ Estimates of claim liabilities for low
frequency/high severity lines can be sensitive to the impact of a small number of potentially large
claims. As a result, the role of judgment is much greater for these reserve estimates. In contrast, for
high frequency/low severity lines the impact of individual claims is relatively minor and the range of
reasonable reserve estimates is narrower and more stable.
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