Travelers 2013 Annual Report Download - page 214

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. REINSURANCE
The Company’s consolidated financial statements reflect the effects of assumed and ceded
reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that
other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance
risks (along with the related written and earned premiums) the Company has underwritten to other
insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to
protect the Company, at a cost, from losses in excess of the amount it is prepared to accept.
Reinsurance is placed on both a quota-share and excess-of-loss basis. Ceded reinsurance arrangements
do not discharge the Company as the primary insurer, except for instances where the primary policy or
policies have been novated.
The Company utilizes general catastrophe reinsurance treaties with unaffiliated reinsurers to help
manage its exposure to losses resulting from catastrophes. In addition to the coverage provided under
these treaties, the Company also utilizes catastrophe bonds and a Northeast catastrophe reinsurance
treaty to protect against losses resulting from catastrophes in the Northeastern United States. The
Company also utilizes excess-of-loss treaties to protect against earthquake losses up to a certain
threshold in the Business Insurance segment (for certain markets) and for the Personal Insurance
segment.
The Company evaluates and monitors the financial condition of its reinsurers under voluntary
reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. In
addition, in the ordinary course of business, the Company may become involved in coverage disputes
with its reinsurers. Some of these disputes could result in lawsuits and arbitrations brought by or
against the reinsurers to determine the Company’s rights and obligations under the various reinsurance
agreements. The Company employs dedicated specialists and strategies to manage reinsurance
collections and disputes.
Included in reinsurance recoverables are amounts related to involuntary reinsurance arrangements.
The Company is required to participate in various involuntary reinsurance arrangements through
assumed reinsurance, principally with regard to residual market mechanisms in workers’ compensation
and automobile insurance, as well as homeowners’ insurance in certain coastal areas. In addition, the
Company provides services for several of these involuntary arrangements (mandatory pools and
associations) under which it writes such residual market business directly, then cedes 100% of this
business to the mandatory pool. Such participations and servicing arrangements are arranged to
mitigate credit risk to the Company, as any ceded balances are jointly backed by all the pool members.
Also included in reinsurance recoverables are amounts related to structured settlements.
Structured settlements are annuities purchased from various life insurance companies to settle certain
personal physical injury claims, of which workers’ compensation claims comprise a significant portion.
In cases where the Company did not receive a release from the claimant, the structured settlement is
included in reinsurance recoverables and the related claim cost is included in the liability for claims and
claim adjustment expense reserves, as the Company retains the contingent liability to the claimant. If it
is expected that the life insurance company is not able to pay, the Company would recognize an
impairment of the related reinsurance recoverable if, and to the extent, the purchased annuities are not
covered by state guaranty associations. In the event that the life insurance company fails to make the
required annuity payments, the Company would be required to make such payments.
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