Travelers 2012 Annual Report Download - page 152

• Types of medical treatments received
• Changes in cost of medical treatments
• Degree of patient responsiveness to treatment
Commercial automobile book of business risk factors
• Changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.)
• Changes in mix of insured vehicles (e.g., long haul trucks versus local and smaller vehicles, fleet
risks versus non-fleets)
• Changes in underwriting standards
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 automobile, 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 10% to 7% (averaging 3%) for the Company, and from 3% to 2%
(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. 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 automobile reserves represent approximately 7% of the Company’s total claims and claim
adjustment expense reserves.
The Company’s change in reserve estimate for this product line was 7% for 2012, 5% for 2011 and
1% for 2010. The 2012 change reflected higher than expected severity in the bodily injury coverage
primarily for accident years 2010 and 2011. The 2011 change reflected worse than expected severity for
the 2009 and 2010 accident years.
Workers’ Compensation
Workers’ compensation is generally considered a long tail coverage, as it takes a relatively long
period of time to finalize claims from a given accident year. While certain payments such as initial
medical treatment or temporary wage replacement for the injured worker are made quickly, some other
payments are made over the course of several years, such as awards for permanent partial injuries. In
addition, some payments can run as long as the injured worker’s life, such as permanent disability
benefits and on-going medical care. Despite the possibility of long payment tails, the reporting lags are
generally short, settlements are generally not complex, and most of the liability can be considered high
frequency with moderate severity. The largest reserve risk generally comes from the low frequency, high
severity claims providing lifetime coverage for medical expense arising from a worker’s injury, as such
claims are subject to greater inflation risk. Overall, the claim liabilities for this line create a somewhat
greater than moderate estimation risk.
Workers’ compensation reserves are typically analyzed in three components: indemnity losses,
medical losses and claim adjustment expenses.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required workers’ compensation reserves (beyond those included in the general discussion section)
include:
Indemnity risk factors
• Time required to recover from the injury
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