Travelers 2014 Annual Report Download - page 139

Table of Contents
Product lines are generally classifiable as either long tail or short tail, based on the average length of time between the event triggering claims
under a policy and the final resolution of those claims. Short tail claims are reported and settled quickly, resulting in less estimation variability. The
longer the time before final claim resolution, the greater the exposure to estimation risks and hence the greater the estimation uncertainty.
A major component of the claim tail is the reporting lag. The reporting lag, which is the time between the event triggering a claim and the
reporting of the claim to the insurer, makes estimating IBNR inherently more uncertain. In addition, the greater the reporting lag, the greater the
proportion of IBNR to the total claim liability for the product line. Writing new products with material reporting lags can result in adding several
years' worth of IBNR claim exposure before the reporting lag exposure becomes clearly observable, thereby increasing the risk associated with
pricing and reserving such products. The most extreme example of claim liabilities with long reporting lags are asbestos claims.
For some lines, the impact of large individual claims can be material to the analysis. These lines are generally referred to as being "low
frequency/high severity," while lines without this "large claim" sensitivity are referred to as "high frequency/low severity." Estimates of claim
liabilities for low frequency/high severity lines can be sensitive to the impact of a small number of potentially large claims. As a result, the role of
judgment is much greater for these reserve estimates. In contrast, for high frequency/low severity lines the impact of individual claims is relatively
minor and the range of reasonable reserve estimates is likely narrower and more stable.
Claim complexity can also greatly affect the estimation process by impacting the number of assumptions needed to produce the estimate, the
potential stability of the underlying data and claim process, and the ability to gain an understanding of the data. Product lines with greater claim
complexity, such as for certain surety and construction exposures, have inherently greater estimation uncertainty.
Actuaries have to exercise a considerable degree of judgment in the evaluation of all these factors in their analysis of reserves. The human
element in the application of actuarial judgment is unavoidable when faced with material uncertainty. Different actuaries may choose different
assumptions when faced with such uncertainty, based on their individual backgrounds, professional experiences and areas of focus. Hence, the
estimates selected by the various actuaries may differ materially from each other.
Lastly, significant structural changes to the available data, product mix or organization can also materially impact the reserve estimation
process. Events such as mergers increase the inherent uncertainty of reserve estimates for a period of time, until stable trends re
- establish
themselves within the new organization.
Risk factors
The major causes of material uncertainty ("risk factors") generally will vary for each product line, as well as for each separately analyzed
component of the product line. In a few cases, such risk factors are explicit assumptions of the estimation method, but in most cases, they are
implicit. For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal
interpretation of existing contract language will remain unchanged. Actual results will likely vary from expectations for each of these assumptions,
causing actual paid losses, as claims are settled in the future, to be different in amount than the reserves being estimated currently.
Some risk factors will affect more than one product line. Examples include changes in claim department practices, changes in settlement
patterns, regulatory and legislative actions, court actions, timeliness of claim reporting, state mix of claimants and degree of claimant fraud. The
extent of the impact of a risk factor will also vary by components within a product line. Individual risk factors are also subject to interactions with
other risk factors within product line components.
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