Travelers 2012 Annual Report Download - page 155

• Type of business insured
• Type of obligation insured
• Cumulative limits of liability for insured
• Assets available to mitigate loss
• Defective workmanship/latent defects
• Financial strategy of insured
• Changes in statutory obligations
• Geographic spread of business
Fidelity and Surety book of business risk factors
• Changes in policy provisions (e.g., deductibles, limits, endorsements)
• 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 fidelity and surety, a 1% increase
(decrease) in incremental paid loss development for each future calendar year could result in a 1.3%
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 11% to 138% (averaging 10%) for the Company, and from 13% to 24%
(averaging 2%) 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 was due to
acquired business in 2004, 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. Fidelity
and surety reserves represent approximately 3% of the Company’s total claims and claim adjustment
expense reserves.
In general, developments on single large claims (both adverse and favorable) are a primary source
of changes in reserve estimates for this product line.
The Company’s change in reserve estimate for this product line was 8% for 2012, 11% for
2011 and 6% for 2010. The 2012 change reflected better than expected results primarily for the
contract surety line of business for accident years 2008 and prior. The 2011 change primarily reflected
better than expected development for accident years 2008 and prior for the contract surety business.
The 2010 change was driven by better than expected loss development due to lower than expected
claim activity and loss severity, primarily for the contract surety business in this product line for the
2008 and prior accident years.
Personal Automobile
Personal automobile includes both short and long tail coverages. The payments that are made
quickly typically pertain to auto physical damage (property) claims and property damage (liability)
claims. The payments that take longer to finalize and are more difficult to estimate relate to bodily
injury claims. Reporting lags are relatively short and the claim settlement process for personal
automobile liability generally is the least complex of the liability products. It is generally viewed as a
high frequency, low to moderate severity product line. Overall, the claim liabilities for this line create a
moderate estimation risk.
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