Travelers 2012 Annual Report Download - page 148

In addition to the conventional actuarial methods mentioned in the general discussion section, the
company utilizes various report year development and S-curve methods for the construction defect
components of this product line. The Construction Defect report year development analysis is
supplemented with projected claim counts and average values for IBNR claim counts. For components
with greater lags in claim reporting, such as excess and umbrella components of this product line, the
company relies more heavily on the BF method than on the paid and case incurred development
methods.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required general liability reserves (beyond those included in the general discussion section) include:
General liability risk factors
• Changes in claim handling philosophies
• Changes in policy provisions or court interpretation of such provisions
• New theories of liability
• Trends in jury awards
• Changes in the propensity to sue, in general with specificity to particular issues
• Changes in the propensity to litigate rather than settle a claim
• Changes in statutes of limitations
• Changes in the underlying court system
• Distortions from losses resulting from large single accounts or single issues
• Changes in tort law
• Shifts in lawsuit mix between federal and state courts
• Changes in claim adjuster office structure (causing distortions in the data)
• The potential impact of inflation on loss costs
• Changes in settlement patterns
General liability book of business risk factors
• Changes in policy provisions (e.g., deductibles, policy limits, endorsements)
• Changes in underwriting standards
• Product mix (e.g., size of account, industries insured, jurisdiction mix)
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a
change in one or more risk factors could have on reserves for general liability (excluding asbestos and
environmental), a 1% increase (decrease) in incremental paid loss development for each future
calendar year could result in a 1.5% increase (decrease) in claims and claim adjustment expense
reserves.
Historically, the one-year change in the reserve estimate for this product line, excluding estimated
asbestos and environmental amounts, over the last nine years has varied from 8% to 10% (averaging
1%) for the Company and from 5% to 6% (averaging 1%) for the industry overall. The
Company’s year-to-year changes are driven by, and are based on, observed events during the year.
Because the high end of the Company’s range of historical adverse development comes from certain
businesses that the Company has since exited, the Company believes that the industry’s range of
historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this
product line. General liability reserves (excluding asbestos and environmental) represent approximately
24% of the Company’s total claims and claim adjustment expense reserves.
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