Travelers 2012 Annual Report Download - page 222

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INSURANCE CLAIM RESERVES (Continued)
of direct actions against the Company, future developments pertaining to the Company’s ability to
recover reinsurance for asbestos and environmental claims and the unavailability of other insurance
sources potentially available to policyholders, whether through exhaustion of policy limits or through
the insolvency of other participating insurers. In addition, uncertainties arise from the insolvency or
bankruptcy of policyholders and other defendants. It is also not possible to predict changes in the legal,
regulatory and legislative environment and their impact on the future development of asbestos and
environmental claims. This environment could be affected by changes in applicable legislation and
future court and regulatory decisions and interpretations, including the outcome of legal challenges to
legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is
also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations
near completion and significant legal questions are resolved or, failing settlement, until the dispute is
adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often
involve a large number of claimants and other parties and require court approval to be effective. As
part of its continuing analysis of asbestos and environmental reserves, the Company continues to study
the implications of these and other developments.
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess
of the Company’s current reserves. In addition, the Company’s estimate of claims and claim adjustment
expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot
now be reasonably estimated and could result in income statement charges that could be material to
the Company’s operating results in future periods.
Catastrophe Exposure
The Company has geographic exposure to catastrophe losses, which can be caused by a variety of
events, including, among others, hurricanes, tornadoes and other windstorms, earthquakes, hail,
wildfires, severe winter weather, floods, tsunamis and volcanic eruptions. Catastrophes can also result
from a terrorist attack (including those involving nuclear, biological, chemical or radiological events),
explosions, infrastructure failures or as a consequence of political instability. The incidence and severity
of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of
both the total amount of insured exposure in the area affected by the event and the severity of the
event. Most catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes
may produce significant damage in larger areas, especially those that are heavily populated. The
Company generally seeks to mitigate its exposure to catastrophes through individual risk selection and
the purchase of catastrophe reinsurance.
There are also risks which impact the estimation of ultimate costs for catastrophes. For example,
the estimation of reserves related to hurricanes can be affected by the inability of the Company and its
insureds to access portions of the impacted areas, the complexity of factors contributing to the losses,
the legal and regulatory uncertainties and the nature of the information available to establish the
reserves. Complex factors include, but are not limited to: determining whether damage was caused by
flooding versus wind; evaluating general liability and pollution exposures; estimating additional living
expenses; the impact of demand surge; infrastructure disruption; fraud; the effect of mold damage and
business income interruption costs; and reinsurance collectibility. The timing of a catastrophe’s
occurrence, such as at or near the end of a reporting period, can also affect the information available
to us in estimating reserves for that reporting period. The estimates related to catastrophes are
adjusted as actual claims emerge.
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