Travelers 2014 Annual Report Download - page 21

Table of Contents
Company has developed a large dedicated catastrophe response team and trained a large Enterprise Response Team of existing employees who can
be deployed on short notice in the event of a catastrophe that generates claim volume exceeding the capacity of the dedicated catastrophe
response team. In recent years, these internal resources were successfully deployed to respond to a record number of catastrophe claims.
REINSURANCE
The Company reinsures a portion of the risks it underwrites in order to manage its exposure to losses and to protect its capital. The Company
cedes to reinsurers a portion of these risks and pays premiums based upon the risk and exposure of the policies subject to such reinsurance. Ceded
reinsurance involves credit risk, except with regard to mandatory pools and associations, and is predominantly subject to aggregate loss limits.
Although the reinsurer is liable to the Company to the extent of the reinsurance ceded, the Company remains liable as the direct insurer on all risks
reinsured. Reinsurance recoverables are reported after reductions for known insolvencies and after allowances for uncollectible amounts. The
Company also holds collateral, including trust agreements, escrow funds and letters of credit, under certain reinsurance agreements. The Company
monitors the financial condition of reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically. Reinsurers are selected
based on their financial condition, business practices, the price of their product offerings and the value of collateral provided. After reinsurance is
purchased, the Company has limited ability to manage the credit risk to a reinsurer. In addition, in a number of jurisdictions, particularly the
European Union and the United Kingdom, a reinsurer is permitted to transfer a reinsurance arrangement to another reinsurer, which may be less
creditworthy, without a counterparty's consent, provided that the transfer has been approved by the applicable regulatory and/or court authority.
For additional information concerning reinsurance, see note 5 of notes to the Company's consolidated financial statements and "Item 1A—
Risk
Factors."
The Company utilizes a variety of reinsurance agreements to manage its exposure to large property and casualty losses, including:
•
facultative reinsurance, in which reinsurance is provided for all or a portion of the insurance provided by a single policy and each
policy reinsured is separately negotiated;
•
quota share reinsurance, in which reinsurance is provided for an agreed - upon fixed percentage of liabilities, premiums and losses for
each policy covered on a pro rata basis;
•
treaty reinsurance, in which reinsurance is provided for a specified type or category of risks; and
•
catastrophe reinsurance, in which the Company is indemnified for an agreed upon amount of contractual loss in excess of a
specified retention with respect to losses resulting from a catastrophic event.
For a description of reinsurance
- related litigation, see note 16 of notes to the Company's consolidated financial statements.
Included in reinsurance recoverables are amounts related to structured settlements, which 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 amount due from the life insurance company related to the structured settlement is
included in the Company's consolidated balance sheet as a reinsurance recoverable 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 covered by state guaranty associations. In the event that the life insurance company fails to make the required annuity payments,
the Company would be required to make such payments.
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