Travelers 2014 Annual Report Download - page 149

Table of Contents
General workers' compensation risk factors
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Frequency of claim reopenings on claims previously closed
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Mortality trends of injured workers with lifetime benefits and medical treatment
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Degree of cost shifting between workers' compensation and health insurance, including Medicare, and the impact, if any, of the
Affordable Care Act
Workers' compensation book of business risk factors
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Product mix
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Injury type mix
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Changes in underwriting standards
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could
have on reserves for workers' compensation, a 1% increase (decrease) in incremental paid loss development for each future calendar year could
result in a 1.3% increase (decrease) in claims and claim adjustment expense reserves.
Historically, the one
- year change in the reserve estimate for this product line over the last nine years has varied from –2% to 1% (averaging
0%) for the Company, and from –2 to 2% (averaging 0%) for the industry overall. The Company's year
- to - year changes are driven by, and are based
on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one
- year
changes in reserve estimates for this product line. Workers' compensation reserves represent approximately 37% of the Company's total claims and
claim adjustment expense reserves.
The Company's change in reserve estimate for this product line was 0% for 2014, –1% in 2013 and –2% in 2012. The 2012 change was primarily
driven by better than expected frequency and severity related to lifetime medical claims for accident years 2008 and prior.
Fidelity and Surety
Fidelity is generally considered a short tail coverage. It takes a relatively short period of time to finalize and settle most fidelity claims. The
volatility of fidelity reserves is generally related to the type of business of the insured, the size and complexity of the insured's business operations,
amount of policy limit and attachment point of coverage. The uncertainty surrounding reserves for small, commercial insureds is typically less than
the uncertainty for large commercial or financial institutions. The high frequency, low severity nature of small commercial fidelity losses provides
for stability in loss estimates, whereas the low frequency, high severity nature of losses for large insureds results in a wider range of ultimate loss
outcomes. Actuarial techniques that rely on a stable pattern of loss development are generally not applicable to low frequency, high severity
claims.
Surety has certain components that are generally considered short tail coverages with short reporting lags, although large individual
construction and commercial surety contracts can result in a long settlement tail, based on the length and complexity of the construction project(s)
or commercial transaction being insured. (Large construction projects can take many years to complete.) The frequency of losses in surety
generally correlates with economic cycles as the primary cause of surety loss is the inability of an insured to fulfill its contractual obligations. The
Company actively seeks to mitigate this exposure to loss through disciplined risk selection, adherence to underwriting standards and ongoing
monitoring of contractor progress in significant construction projects. The volatility of surety losses is generally related to the type of business
performed by the insured, the type of bonded obligation, the amount of limit exposed to loss and the amount of assets available to the insurer to
mitigate losses, such as unbilled contract funds, collateral, first and third party indemnity, and other
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