Travelers 2014 Annual Report Download - page 150

Table of Contents
security positions of an insured's assets. Certain classes of surety claims are very high severity, low frequency in nature. These can include large
construction contractors involved with one or multiple large, complex projects as well as certain large commercial surety exposures. Other claim
factors affecting reserve variability of surety include litigation related to amounts owed by and due the insured (e.g., salvage and subrogation
efforts) and the results of financial restructuring of an insured.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required fidelity and surety reserves (beyond
those included in the general discussion section) include:
Fidelity risk factors
•
Type of business of insured
•
Policy limit and attachment points
•
Third - party claims
•
Coverage litigation
•
Complexity of claims
•
Growth in insureds' operations
Surety risk factors
•
Economic trends, including the general level of construction activity
•
Concentration of reserves in a relatively few large claims
•
Type of business insured
•
Type of obligation insured
•
Cumulative limits of liability for insured
•
Assets available to mitigate loss
•
Defective workmanship/latent defects
•
Financial strategy of insured
•
Changes in statutory obligations
•
Geographic spread of business
Fidelity and Surety book of business risk factors
•
Changes in policy provisions (e.g., deductibles, limits, endorsements)
•
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 fidelity and surety, 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 –36% to –1% (averaging
–12%) for the Company, and from –13% to 14% (averaging –5%) 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. Fidelity and surety reserves represent approximately 2% of the Company's total claims
and claim adjustment expense reserves.
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