Travelers 2012 Annual Report Download - page 150

incremental paid loss development for each future calendar year could result in a 1.1% increase
(decrease) in claims and claim adjustment expense reserves.
Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 34% to 5% (averaging 18%) for the Company, and from 14% to 2%
(averaging 9%) for the industry overall. The Company’s year-to-year changes are driven by, and are
based on, observed events during the year. The Company believes that its range of historical outcomes
is illustrative of reasonably possible one-year changes in reserve estimates for this product line.
Commercial property reserves represent approximately 3% of the Company’s total claims and claim
adjustment expense reserves.
Since commercial property is considered a short tail coverage, the one year change for commercial
property can be more volatile than that for the longer tail product lines. This is due to the fact that the
majority of the reserve for commercial property relates to the most recent accident year, which is
subject to the most uncertainty for all product lines. This recent accident year uncertainty is relevant to
commercial property because of weather-related events which, notwithstanding 2010 and 2011
experience, tend to be concentrated in the second half of the year, and generally are not completely
resolved until the following year. Reserve estimates associated with major catastrophes may take even
longer to resolve. The reserve estimates for this product line are also potentially subject to material
changes due to uncertainty in measuring ultimate losses for significant catastrophes such as the events
of September 11, 2001, Hurricane Katrina and Storm Sandy.
The Company’s change in reserve estimate for this product line was 22% for 2012, 5% for
2011 and 25% for 2010. The 2012 change primarily reflected better than expected development for
accident years 2009 through 2011, driven by favorable loss development related to catastrophe losses
incurred in 2011, and by higher subrogation and salvage recoveries for accident years 2009 through
2011. The 2011 change primarily reflected better than expected development in the 2008 and 2009
accident years for certain large national property and ocean marine exposures. The 2010 change
primarily occurred in the 2008 and 2009 accident years as a result of better than expected loss
development in Industry-Focused Underwriting and Target Risk Underwriting.
Commercial Multi-Peril
Commercial multi-peril provides a combination of property and liability coverage typically for small
businesses and, therefore, includes both short and long tail coverages. For property coverage, it
generally takes a relatively short period of time to close claims, while for the other coverages, generally
for the liability coverages, it takes a longer period of time to close claims.
The reserving risk for this line is dominated by the liability coverage portion of this product, except
occasionally in the event of catastrophic or large single losses. The reserving risk for this line differs
from that of the general liability product line and the property product line due to the nature of the
customer. Commercial multi-peril is generally sold to smaller-sized accounts, while the customer profile
for general liability and commercial property includes larger customers.
See ‘‘Commercial property risk factors’’ and ‘‘General liability risk factors,’’ discussed above, with
regard to reserving risk for commercial multi-peril.
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 commercial multi-peril (excluding
asbestos and environmental), a 1% increase (decrease) in incremental paid loss development for each
future calendar year could result in a 1.2% increase (decrease) in claims and claim adjustment expense
reserves.
Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 19% to 5% (averaging 6%) for the Company, and from 6% to 3%
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