Travelers 2013 Annual Report Download - page 35

commensurate with the size of the respective local balance sheet. The Company conducts an ongoing
review of its risk and catastrophe coverages and makes changes as it deems appropriate.
Terrorism Risk Insurance Program. The Terrorism Risk Insurance Program is a Federal program
administered by the Department of the Treasury that provides for a system of shared public and private
compensation for certain insured losses resulting from certified acts of terrorism. The current program
has been authorized through 2014. For a further description of the program, including the Company’s
estimated deductible under the program in 2014, see note 5 of notes to the Company’s consolidated
financial statements and ‘‘Item 1A—Risk Factors—Catastrophe losses could materially and adversely
affect our results of operations, our financial position and/or liquidity, and could adversely impact our
ratings, our ability to raise capital and the availability and cost of reinsurance.’’
CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES
Claims and claim adjustment expense reserves represent management’s estimate of ultimate unpaid
costs of losses and loss adjustment expenses for claims that have been reported and claims that have
been incurred but not yet reported.
The Company continually refines its reserve estimates in a regular ongoing process that includes
review of key assumptions, underlying variables and historical loss experience. The Company reflects
adjustments to reserves in the results of operations in the periods in which the estimates are changed.
In establishing reserves, the Company takes into account estimated recoveries for reinsurance, salvage
and subrogation. The reserves are also reviewed regularly by qualified actuaries employed by the
Company. For additional information on the process of estimating reserves and a discussion of
underlying variables and risk factors, see ‘‘Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting Estimates.’’
The process of estimating loss reserves involves a high degree of judgment and is subject to a
number of variables. These variables (discussed by product line in the ‘‘Critical Accounting Estimates’’
section of ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of
Operations’’) are affected by both internal and external events, such as changes in claims handling
procedures, inflation, judicial trends and legislative changes, among others. The impact of many of
these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Reserve
estimation difficulties also differ significantly by product line due to differences in the underlying
insurance contract (e.g., claims-made versus occurrence), claim complexity, the volume of claims, the
potential severity of individual claims, the determination of the occurrence date for a claim, and
reporting lags (the time between the occurrence of the insured event and when it is actually reported
to the insurer). Informed judgment is applied throughout the process.
The Company derives estimates for unreported claims and development on reported claims
principally from actuarial analyses of historical patterns of loss development by accident year for each
type of exposure and business unit. Similarly, the Company derives estimates of unpaid loss adjustment
expenses principally from actuarial analyses of historical development patterns of the relationship of
loss adjustment expenses to losses for each line of business and type of exposure. For a description of
the Company’s reserving methods for asbestos and environmental claims, see ‘‘Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and
Litigation,’’ and ‘‘—Environmental Claims and Litigation.’’
Discounting
The claims and claim adjustment expense reserves for most long-term disability and annuity claim
payments, primarily arising from workers’ compensation insurance and workers’ compensation excess
insurance policies, were discounted to the present value of estimated future payments using a rate of
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