Travelers 2014 Annual Report Download - page 206

Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. REINSURANCE
The Company's consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance
refers to the acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring
certain insurance risks (along with the related written and earned premiums) the Company has underwritten to other insurance companies who
agree to share these risks. The primary purpose of ceded reinsurance is to protect the Company, at a cost, from losses in excess of the amount it is
prepared to accept and to protect the Company's capital. Reinsurance is placed on both a quota
- share and excess - of - loss basis. Ceded reinsurance
arrangements do not discharge the Company as the primary insurer, except for instances where the primary policy or policies have been novated,
such as in certain structured settlement agreements.
The Company utilizes general corporate catastrophe treaties with unaffiliated reinsurers to help manage its exposure to losses resulting from
catastrophes and protect its capital. In addition to the coverage provided under these treaties, the Company also utilizes catastrophe bonds to
protect against hurricane losses in the Northeastern United States, and a Northeast catastrophe reinsurance treaty to protect against losses
resulting from weather
- related and earthquake catastrophes in the Northeastern United States. The Company also utilizes excess - of - loss treaties to
protect against earthquake losses up to a certain threshold in the Business and International Insurance segment (for certain markets) and for the
Personal Insurance segment, and several reinsurance treaties specific to its international operations.
The Company monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to evaluate the collectability of
amounts due from reinsurers and as a basis for determining the reinsurers with which the Company conducts ongoing business. In addition, in the
ordinary course of business, the Company may become involved in coverage disputes with its reinsurers. Some of these disputes could result in
lawsuits and arbitrations brought by or against the reinsurers to determine the Company's rights and obligations under the various reinsurance
agreements. The Company employs dedicated specialists and strategies to manage reinsurance collections and disputes.
Included in reinsurance recoverables are amounts related to involuntary reinsurance arrangements. The Company is required to participate in
various involuntary reinsurance arrangements through assumed reinsurance, principally with regard to residual market mechanisms in workers'
compensation and automobile insurance, as well as homeowners' insurance in certain coastal areas. In addition, the Company provides services for
several of these involuntary arrangements (mandatory pools and associations) under which it writes such residual market business directly, then
cedes 100% of this business to the mandatory pool. Such participations and servicing arrangements are arranged to mitigate credit risk to the
Company, as any ceded balances are jointly backed by all the pool members.
Also included in reinsurance recoverables are amounts related to structured settlements. Structured settlements are annuities purchased from
various life insurance companies to settle certain personal physical injury claims, of which workers' compensation claims comprise a significant
portion. In cases where the Company did not receive a release from the claimant, the structured settlement is included in reinsurance recoverables
and the related claim cost is included in the liability for claims and claim adjustment expense reserves, as the Company retains the contingent
liability to the claimant. If it is expected that the life insurance company is not able to pay, the Company would recognize an impairment of the
related reinsurance recoverable if, and to the extent, the purchased annuities are not
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