Travelers 2014 Annual Report Download - page 53

Table of Contents
States have from time to time passed legislation, and regulators have taken action, that have the effect of limiting the ability of insurers to
manage catastrophe risk, such as legislation prohibiting insurers from reducing exposures or withdrawing from catastrophe
- prone areas or
mandating that insurers participate in residual markets. Participation in residual market mechanisms has resulted in, and may continue to result in,
significant losses or assessments to insurers, including us, and, in certain states, those losses or assessments may not be commensurate with our
direct catastrophe exposure in those states. If our competitors leave those states having residual market mechanisms, remaining insurers, including
us, may be subject to significant increases in losses or assessments following a catastrophe. In addition, following catastrophes, there are
sometimes legislative and administrative initiatives and court decisions that seek to expand insurance coverage for catastrophe claims beyond the
original intent of the policies or seek to prevent the application of deductibles. Also, our ability to adjust terms, including deductible levels, or to
increase pricing to the extent necessary to offset rising costs of catastrophes, particularly in the Personal Insurance segment, requires approval of
regulatory authorities of certain states. Our ability or our willingness to manage our catastrophe exposure by raising prices, modifying underwriting
terms or reducing exposure to certain geographies may be limited due to considerations of public policy, the evolving political environment and/or
changes in the general economic climate. We also may choose to write business in catastrophe
- prone areas that we might not otherwise write for
strategic purposes, such as improving our access to other underwriting opportunities.
There are also factors that impact the estimation of ultimate costs for catastrophes. For example, the estimation of claims and claim adjustment
expense reserves related to hurricanes can be affected by the inability to access portions of the impacted areas, the complexity of factors
contributing to the losses, the legal and regulatory uncertainties and the nature of the information available to establish the claims and claim
adjustment expense reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind;
evaluating general liability and pollution exposures; estimating additional living expenses; the impact of demand surge; infrastructure disruption;
fraud; the effect of mold damage; business interruption costs; and reinsurance collectability. In recent years, increased late reporting of weather
-
related losses by claimants, particularly losses from hail damage, has led to higher costs than we previously expected. The timing of a catastrophe's
occurrence, such as at or near the end of a reporting period, can also affect the information available to us in estimating claims and claim adjustment
expense reserves for that reporting period. The estimates related to catastrophes are adjusted in subsequent periods as actual claims emerge and
additional information becomes available.
Exposure to catastrophe losses or actual losses resulting from a catastrophe could adversely affect our financial strength and claims
- paying
ratings and could impair our ability to raise capital on acceptable terms or at all. Also, as a result of our exposure to catastrophe losses or actual
losses following a catastrophe, rating agencies may further increase capital requirements, which may require us to raise capital to maintain our
ratings. A ratings downgrade could hurt our ability to compete effectively or attract new business. In addition, catastrophic events could cause us
to exhaust our available reinsurance limits and could adversely impact the cost and availability of reinsurance. Such events can also impact the
credit of our reinsurers. For a discussion of our catastrophe reinsurance coverage, see "Item 1—Business—Reinsurance—Catastrophe
Reinsurance." Catastrophic events could also adversely impact the credit of the issuers of securities, such as states or municipalities, in whom we
have invested.
In addition, coverage in our reinsurance program for terrorism is limited. Although the Terrorism Risk Insurance Program provides benefits in
the event of certain acts of terrorism, those benefits are subject to a deductible and other limitations. The program expired at the end of 2014 but
was reauthorized, with some adjustments to its provisions, in January 2015 for six years through December 31, 2020. Under current provisions of
this program, once our losses exceed 20% of our
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