Travelers 2014 Annual Report Download - page 25

Table of Contents
Terrorism Risk Insurance Program. The Terrorism Risk Insurance Program is a Federal program administered by the Department of the
Treasury that provides for a system of shared public and private compensation for certain insured losses resulting from certified acts of terrorism.
In January 2015, the program was reauthorized through December 31, 2020. For a further description of the program, including the Company's
estimated deductible under the program in 2015, see note 5 of notes to the Company's consolidated financial statements and "Item 1A—
Risk
Factors—Catastrophe losses could materially and adversely affect our results of operations, our financial position and/or liquidity, and could
adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance."
CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES
Claims and claim adjustment expense reserves represent management's estimate of ultimate unpaid costs of losses and loss adjustment
expenses for claims that have been reported and claims that have been incurred but not yet reported.
The Company continually refines its reserve estimates in a regular ongoing process that includes review of key assumptions, underlying
variables and historical loss experience. The Company reflects adjustments to reserves in the results of operations in the periods in which the
estimates are changed. In establishing reserves, the Company takes into account estimated recoveries for reinsurance, salvage and subrogation.
The reserves are also reviewed regularly by qualified actuaries employed by the Company. For additional information on the process of estimating
reserves and a discussion of underlying variables and risk factors, see "Item 7—Management's Discussion and Analysis of Financial Condition
and Results of Operations—Critical Accounting Estimates."
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables
(discussed by product line in the "Critical Accounting Estimates" section of "Item 7—Management's Discussion and Analysis of Financial
Condition and Results of Operations") are affected by both internal and external events, such as changes in claims handling procedures, inflation,
judicial trends and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment
expenses is difficult to estimate. Reserve estimation difficulties also differ significantly by product line due to differences in the underlying
insurance contract (e.g., claims
- made versus occurrence), claim complexity, the volume of claims, the potential severity of individual claims, the
determination of the occurrence date for a claim, and reporting lags (the time between the occurrence of the insured event and when it is actually
reported to the insurer). Informed judgment is applied throughout the process.
The Company derives estimates for unreported claims and development on reported claims principally from actuarial analyses of historical
patterns of loss development by accident year for each type of exposure and business unit. Similarly, the Company derives estimates of unpaid
loss adjustment expenses principally from actuarial analyses of historical development patterns of the relationship of loss adjustment expenses to
losses for each line of business and type of exposure. For a description of the Company's reserving methods for asbestos and environmental
claims, see "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and Litigation,"
and "—Environmental Claims and Litigation."
Discounting
The claims and claim adjustment expense reserves for most long
- term disability and annuity claim payments, primarily arising from workers'
compensation insurance and workers' compensation excess insurance policies, were discounted to the present value of estimated future payments
using a rate of 5% at both December 31, 2014 and 2013. These discounted reserves totaled $2.01 billion and $2.21 billion at December 31, 2014 and
2013, respectively.
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