Travelers 2013 Annual Report Download - page 19

Pricing and Underwriting
Business Insurance utilizes underwriting, claims, engineering, actuarial and product development
disciplines for particular industries, in conjunction with extensive amounts of proprietary data gathered
and analyzed over many years, to facilitate its risk selection process and develop pricing parameters.
The Company utilizes both standard industry forms and proprietary forms for the insurance policies it
issues.
A portion of business in this segment, particularly in National Accounts and Construction, is
written with large deductible insurance policies. Under workers’ compensation insurance contracts with
deductible features, the Company is obligated to pay the claimant the full amount of the claim. The
Company is subsequently reimbursed by the contractholder for the deductible amount and is subject to
credit risk until such reimbursement is made. At December 31, 2013, contractholder payables on
unpaid losses within the deductible layer of large deductible policies and the associated receivables
were each approximately $4.31 billion. Business Insurance also utilizes retrospectively rated policies for
another portion of the business, primarily for workers’ compensation coverage. Although the
retrospectively rated feature of the policy substantially reduces insurance risk for the Company, it
introduces additional credit risk to the Company. Premium receivables from holders of retrospectively
rated policies totaled approximately $99 million at December 31, 2013. Significant collateral, primarily
letters of credit and, to a lesser extent, cash collateral or trusts, is generally obtained for large
deductible plans and/or retrospectively rated policies that provide for deferred collection of deductible
recoveries and/or ultimate premiums. The amount of collateral requested is predicated upon the
creditworthiness of the customer and the nature of the insured risks. Business Insurance continually
monitors the credit exposure on individual accounts and the adequacy of collateral.
Product Lines
The Business Insurance segment writes the following types of coverages:
•Workers’ Compensation. Provides coverage for employers for specified benefits payable under
state or federal law for workplace injuries to employees. There are typically four types of
benefits payable under workers’ compensation policies: medical benefits, disability benefits, death
benefits and vocational rehabilitation benefits. The Company emphasizes managed care cost
containment strategies, which involve employers, employees and care providers in a cooperative
effort that focuses on the injured employee’s early return to work and cost-effective quality care.
The Company offers the following types of workers’ compensation products:
• guaranteed-cost insurance products, in which policy premium charges are fixed for the
period of coverage and do not vary as a result of the insured’s loss experience;
• loss-sensitive insurance products, including large deductible and retrospectively rated
policies, in which fees or premiums are adjusted based on actual loss experience of the
insured during the policy period; and
• service programs, which are generally sold to the Company’s National Accounts customers,
where the Company receives fees rather than premiums for providing loss prevention, risk
management, and claim and benefit administration services to organizations under service
agreements.
The Company also participates in state assigned risk pools as a servicing carrier and pool
participant.
•Commercial Automobile. Provides coverage for businesses against losses incurred from personal
bodily injury, bodily injury to third parties, property damage to an insured’s vehicle and property
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