Travelers 2013 Annual Report Download - page 49

The basic premise of the method is that average claim values are
stable and predictable over time for a particular cohort of claims.
The method is utilized most often where ultimate claim counts are
known or reliably estimable fairly early after the start of an accident
year and average values are expected to be fairly predictable from
one year to the next.
The method comes up with an estimate of ultimate claims counts by
accident year cohort, and multiplies it by an estimate of average
claim value by accident year cohort, with multiple methods used to
estimate these average claim values.
Book value per share ........ Total common shareholders’ equity divided by the number of
common shares outstanding.
Bornhuetter-Ferguson method . . A conventional actuarial method to estimate ultimate losses for a
given cohort of claims such as an accident year/product line
component. If the paid-to-date losses are then subtracted from the
estimated ultimate losses, the result is an indication of the
outstanding losses.
The basic premise of the method is that the historical ratio of
additional claim activity to earned premium for a given product line
component/age-to-age period is stable and predictable. It implicitly
assumes that the actual activity to date for past periods for that
cohort is not a credible predictor of future activity for that cohort,
or at least is not credible enough to override the ‘‘a priori’’
assumption as to future activity. It may be applied to either paid or
case incurred claim data. It is used most often where the claim data
is sparse and/or volatile and for relatively young cohorts with low
volumes and/or data credibility.
To illustrate, the method may assume that the ratio of additional
paid losses from the 12 to 24 month period for an accident year is
10% of the original ‘‘a priori’’ expected losses for that accident
year. The original ‘‘a priori’’ expected losses are typically based on
the original loss ratio assumption for that accident year, with
subsequent adjustment as facts develop.
The ultimate losses equal actual activity to date plus the expected
values for future periods.
Broker ................... One who negotiates contracts of insurance or reinsurance on behalf
of an insured party, receiving a commission from the insurer or
reinsurer for placement and other services rendered.
Capacity .................. The percentage of surplus, or the dollar amount of exposure, that
an insurer or reinsurer is willing or able to place at risk. Capacity
may apply to a single risk, a program, a line of business or an entire
book of business. Capacity may be constrained by legal restrictions,
corporate restrictions or indirect restrictions.
Captive .................. A closely-held insurance company whose primary purpose is to
provide insurance coverage to the company’s owners or their
affiliates.
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