Travelers 2013 Annual Report Download - page 31

concerning reinsurance, see note 5 of notes to the Company’s consolidated financial statements and
‘‘Item 1A—Risk Factors.’’
The Company utilizes a variety of reinsurance agreements to manage its exposure to large property
and casualty losses, including:
• facultative reinsurance, in which reinsurance is provided for all or a portion of the insurance
provided by a single policy and each policy reinsured is separately negotiated;
• quota share reinsurance, in which reinsurance is provided for an agreed-upon fixed percentage
of liabilities, premiums and losses for each policy covered on a pro rata basis;
• treaty reinsurance, in which reinsurance is provided for a specified type or category of risks; and
• catastrophe reinsurance, in which the Company is indemnified for an amount of loss in excess of
a specified retention with respect to losses resulting from a catastrophic event.
For a description of reinsurance-related litigation, see note 16 of notes to the Company’s
consolidated financial statements.
Included in reinsurance recoverables are amounts related to structured settlements, which 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 amount due from the life insurance company
related to the structured settlement is included in the Company’s consolidated balance sheet as a
reinsurance recoverable 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.
Catastrophe Reinsurance
Catastrophes 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 areas that are heavily populated. The Company generally seeks to manage its exposure to
catastrophes through individual risk selection and the purchase of catastrophe reinsurance. The
Company utilizes a general catastrophe reinsurance treaty with unaffiliated reinsurers to manage its
exposure to losses resulting from catastrophes. In addition to the coverage provided under this treaty,
the Company also utilizes catastrophe bonds, as well as a Northeast catastrophe reinsurance treaty, to
protect against certain losses resulting from catastrophes in the Northeastern United States. In
addition, the Company also has a general catastrophe aggregate excess-of-loss reinsurance treaty, two
earthquake excess-of-loss reinsurance treaties and several reinsurance treaties specific to its
international operations.
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