Travelers 2013 Annual Report Download - page 64

slowdown or financial disruption. These include risks discussed below related to our investment
portfolio, reinsurance arrangements, other credit exposures, our estimates of claims and claim
adjustment expense reserves, emerging claim and coverage issues, the competitive environment,
regulatory developments and the impact of rating agency actions. You should also refer to ‘‘Item 7—
Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, particularly
the ‘‘Outlook’’ section.
Many of these risks could materialize, and our financial results could be negatively impacted, even
after the end of an economic downturn or financial disruption. During or following an economic
downturn, lower levels of economic activity could reduce (and historically have reduced) exposure
changes at renewal. They also could adversely impact (and historically have adversely impacted) audit
premium adjustments, policy endorsements and mid-term cancellations after policies are written,
particularly in our business units within Business Insurance, which could adversely impact our written
premiums. In addition, because earned premiums lag written premiums, our results can be adversely
affected after general economic conditions have improved. An inflationary environment (which may
follow government efforts to stabilize the economy) may also, as we discuss below, adversely impact our
loss costs and could adversely impact the valuation of our investment portfolio. Finally, as a result of
financial market disruption, we may, as discussed below, face increased regulation.
If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the
estimated level of claims and claim adjustment expense reserves are necessary, our financial results
could be materially and adversely affected. Claims and claim adjustment expense reserves do not
represent an exact calculation of liability, but instead represent management estimates of what the
ultimate settlement and administration of claims will cost, generally utilizing actuarial expertise and
projection techniques, at a given accounting date.
The process of estimating claims and claim adjustment expense reserves involves a high degree of
judgment and is subject to a number of variables. These variables can be affected by both internal and
external events, such as: changes in claims handling procedures; adverse changes in loss cost trends,
including inflationary pressures on medical costs and auto and home repair costs; economic conditions
including general inflation; legal trends and legislative changes; and varying judgments and viewpoints
of the individuals involved in the estimation process, among others. The impact of many of these items
on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Claims and claim
adjustment expense reserve estimation difficulties also differ significantly by product line due to
differences in claim complexity, the volume of claims, the potential severity of individual claims, the
determination of occurrence date for a claim and reporting lags (the time between the occurrence of
the policyholder event and when it is actually reported to the insurer).
As discussed above, it is possible that steps taken by the federal government to stabilize the
economy could lead to higher inflation than we had anticipated, which could in turn lead to an increase
in our loss costs. The impact of inflation on loss costs could be more pronounced for those lines of
business that are considered ‘‘long tail’’, such as general liability, as they require a relatively long period
of time to finalize and settle claims for a given accident year. In addition, inflationary pressures in
medical costs may be increased by the healthcare reform legislation and its implementation. The
estimation of claims and claim adjustment expense reserves may also be more difficult during times of
adverse or uncertain economic conditions due to unexpected changes in behavior of claimants and
policyholders, including an increase in fraudulent reporting of exposures and/or losses, reduced
maintenance of insured properties or increased frequency of small claims or delays in the reporting of
claims.
We continually refine our claims and claim adjustment expense reserve estimates in a regular,
ongoing process as historical loss experience develops, additional claims are reported and settled and
the legal, regulatory and economic environment evolves. Business judgment is applied throughout the
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