Travelers 2014 Annual Report Download - page 141

Table of Contents
The results of such methodologies are subjected to various reasonability and diagnostic tests, including paid
- to - incurred loss ratios, implied
incurred
- loss - to - earned - premium ratios and non - zero claim severity trends. An actual versus expected analysis is also performed comparing actual
loss development to expected development embedded within management's best estimate. Additional analyses may be performed based on the
results of these diagnostics, including the investigation of other actuarial methods.
The methods described above are generally utilized to evaluate management's existing estimate for prior accident periods. For the initial
estimate of the current accident year, the available claim data is typically insufficient to produce a reliable indication. Hence, the initial estimate for
an accident year is generally based on a loss ratio projection method, which uses the earned premium for the current year multiplied by a projected
loss ratio. The projected loss ratio is determined through an analysis of prior periods' experience, using loss trend, rate level differences, mix of
business changes and other known or observed factors influencing the current accident year relative to prior accident years. The exact number of
prior accident years utilized varies by product line component, based on the volume of business for that component and the reliability of an
individual accident year estimate.
Management's estimates
At least once per quarter, certain members of Company management meet with the Company's actuaries to review the latest claims and claim
adjustment expense reserve analyses. Based on these analyses, management determines whether its ultimate claim liability estimates should be
changed. In doing so, it must evaluate whether the new data provided represents credible actionable information or an anomaly that will have no
effect on estimated ultimate claim liability. For example, as described above, payments may have decreased in one geographic region due to fewer
claim adjusters being available to process claims. The resulting claim payment patterns would be analyzed to determine whether or not the change
in payment pattern represents a change in ultimate claim liability.
Such an assessment requires considerable judgment. It is frequently not possible to determine whether a change in the data is an anomaly until
sometime after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change
until sometime later. The overall detailed analyses supporting such an effort can take several months to perform. This is because the underlying
causes of the trends observed need to be evaluated, which may require the gathering or assembling of data not previously available. It may also
include interviews with experts involved with the underlying processes. As a result, there can be a time lag between the emergence of a change and
a determination that the change should be reflected in the Company's estimated claim liabilities. The final estimate selected by management in a
reporting period is based on these various detailed analyses of past data, adjusted to reflect any new actionable information.
The Audit Committee of the Board of Directors is responsible for providing oversight of reserving propriety, and annually reviews the process
by which the Company establishes reserves.
Discussion of Product Lines
The following section details reserving considerations and common risk factors by product line. There are many additional risk factors that
may impact ultimate claim costs. Each risk factor presented will have a different impact on required reserves. Also, risk factors can have offsetting
or compounding effects on required reserves. For example, in workers' compensation, the use of expensive medical procedures that result in medical
cost inflation may enable workers to return to work faster, thereby lowering indemnity costs. Thus, in almost all cases, it is impossible to discretely
measure the effect of a single risk factor and construct a meaningful sensitivity expectation.
In order to provide information on reasonably possible reserving changes by product line, the historical changes in year - end claims and claim
adjustment expense reserves over a one
- year period are
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