Travelers 2014 Annual Report Download - page 140

Table of Contents
The effect of a particular risk factor on estimates of claim liabilities cannot be isolated in most cases. For example, estimates of potential claim
settlements may be impacted by the risk associated with potential court rulings, but the final settlement agreement typically does not delineate how
much of the settled amount is due to this and other factors.
The evaluation of data is also subject to distortion from extreme events or structural shifts, sometimes in unanticipated ways. For example, the
timing of claims payments in one geographic region will be impacted if claim adjusters are temporarily reassigned from that region to help settle
catastrophe claims in another region.
While some changes in the claim environment are sudden in nature (such as a new court ruling affecting the interpretation of all contracts in
that jurisdiction), others are more evolutionary. Evolutionary changes can occur when multiple factors affect final claim values, with the uncertainty
surrounding each factor being resolved separately, in stepwise fashion. The final impact is not known until all steps have occurred.
Sudden changes generally cause a one
- time shift in claim liability estimates, although there may be some lag in reliable quantification of their
impact. Evolutionary changes generally cause a series of shifts in claim liability estimates, as each component of the evolutionary change becomes
evident and estimable.
Actuarial methods for analyzing and estimating claims and claim adjustment expense reserves
The principal estimation and analysis methods utilized by the Company's actuaries to evaluate management's existing estimates for prior
accident periods are the paid development method, the case incurred development method, the Bornhuetter
- Ferguson (BF) method, and average
value analysis combined with the reported claim development method. The BF method is usually utilized for more recent accident periods, with a
transition to other methods as the underlying claim data becomes more voluminous and therefore more credible. These are typically referred to as
conventional actuarial methods. (See Glossary for an explanation of these methods).
While these are the principal methods utilized throughout the Company, actuaries evaluating a particular component for a product line have
available to them the full range of methods developed within the casualty actuarial profession. The Company's actuaries are also continually
monitoring developments within the profession for advances in existing techniques or the creation of new techniques that might improve current
and future estimates.
Some components of product line reserves are susceptible to relatively infrequent large claims that can materially impact the total estimate for
that component. In such cases, the Company's actuarial analysis generally isolates and analyzes separately such large claims. The reserves
excluding such large claims are generally analyzed using the conventional methods described above. The reserves associated with large claims are
then analyzed utilizing various methods, such as:
•
Estimating the number of large claims and their average values based on historical trends from prior accident periods, adjusted for
the current environment and supplemented with actual data for the accident year analyzed to the extent available.
•
Utilizing individual claim adjuster estimates of the large claims, combined with continual monitoring of the aggregate accuracy of
such claim adjuster estimates. (This monitoring may lead to supplemental adjustments to the aggregate of such claim estimates.)
•
Utilizing historic longer - term average ratios of large claims to small claims, and applying such ratios to the estimated ultimate small
claims from conventional analysis.
•
Ground - up analysis of the underlying exposure (typically used for asbestos and environmental).
139