Travelers 2014 Annual Report Download - page 55

Table of Contents
the risk factors discussed below identify risks that result from, or are exacerbated by, an economic slowdown or financial disruption. These include
risks discussed below related to our investment portfolio, reinsurance arrangements, other credit exposures, our estimates of claims and claim
adjustment expense reserves, emerging claim and coverage issues, the competitive environment, regulatory developments and the impact of rating
agency actions. You should also refer to "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations,"
particularly the "Outlook" section.
Many of these risks could materialize, and our financial results could be negatively impacted, even after the end of an economic downturn or
financial disruption. During or following an economic downturn, lower levels of economic activity could reduce (and historically have reduced)
exposure changes at renewal. They also could adversely impact (and historically have adversely impacted) audit premium adjustments, policy
endorsements and mid
- term cancellations after policies are written, particularly in our business units within Business and International Insurance,
which could adversely impact our written premiums. An inflationary environment (which may follow government efforts to stabilize the economy)
may also, as we discuss below, adversely impact our loss costs and could adversely impact the valuation of our investment portfolio. Finally, as a
result of financial market disruption, we may, as discussed below, face increased regulation.
If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim
adjustment expense reserves are necessary, our financial results could be materially and adversely affected. Claims and claim adjustment
expense reserves do not represent an exact calculation of liability, but instead represent management estimates of what the ultimate settlement and
administration of claims will cost, generally utilizing actuarial expertise and projection techniques, at a given accounting date.
The process of estimating claims and claim adjustment expense reserves involves a high degree of judgment and is subject to a number of
variables. These variables can be affected by both internal and external events, such as: changes in claims handling procedures; adverse changes
in loss cost trends, including inflationary pressures on medical costs and auto and home repair costs; economic conditions including general
inflation; legal trends and legislative changes; and varying judgments and viewpoints of the individuals involved in the estimation process, among
others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Claims and claim
adjustment expense reserve estimation difficulties also differ significantly by product line due to differences in claim complexity, the volume of
claims, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the
occurrence of the policyholder event and when it is actually reported to the insurer).
As discussed above, it is possible that steps taken by the federal government to stabilize the economy could lead to higher inflation than we
had anticipated, which could in turn lead to an increase in our loss costs. The impact of inflation on loss costs could be more pronounced for those
lines of business that are considered "long tail," such as general liability, as they require a relatively long period of time to finalize and settle claims
for a given accident year. In addition, a significant portion of claims costs, including those in "long tail" lines of business, consists of medical
costs. Healthcare reform legislation and its implementation may significantly impact the availability, cost and allocation of payments for medical
services, and it is possible that, as a result, inflationary pressures in medical costs may increase or claim frequency and/or severity may otherwise
be adversely impacted. The estimation of claims and claim adjustment expense reserves may also be more difficult during times of adverse or
uncertain economic conditions due to unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent
reporting of exposures and/or losses, reduced maintenance of insured properties or increased frequency of small claims or delays in the reporting
of claims.
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