Travelers 2014 Annual Report Download - page 62

Table of Contents
sought to participate in the property and casualty insurance and reinsurance businesses. Well
- capitalized new entrants to the property and
casualty insurance and reinsurance industries, or existing competitors that receive substantial infusions of capital, may conduct business in ways
that adversely impact our business volumes and profitability. Further, an expanded supply of reinsurance capital may lower costs for insurers that
rely significantly on reinsurance and, as a consequence, those insurers may be able to price their products more competitively. In addition, the
competitive environment could be impacted by changes in customer preferences, including customer demand for direct distribution channels, not
only in personal lines (where we currently and may increasingly compete against direct writers), but also in commercial lines (where direct writers
may become a more significant source of competition in the future, particularly in the small commercial market).
In Personal Insurance, the use of comparative rating technologies has impacted, and may continue to impact, our business as well as the
industry as a whole. A substantial amount of the Company's Personal Insurance new business is written after an agent compares quotes using
comparative rating technologies, a cost
- efficient means of obtaining quotes from multiple companies. Because the use of this technology, whether
by agents or directly by customers, facilitates the process of generating multiple quotes, the technology has increased price comparison on new
business and, increasingly, on renewal business. It also has resulted in an increase in the level of quote activity and a lower percentage of quotes
that result in new business from customers, and these trends may continue or accelerate. If we are not able to operate with a competitive cost
structure or accurately estimate and price for claims and claim adjustment expenses, our underwriting margins could be adversely affected over
time. Additionally, similar technology is starting to be used to access comparative rates for small commercial business and that trend may continue
or accelerate. Agents, brokers, significant technology companies or other third parties may also create alternate distribution channels for personal
or commercial business, such as insurance exchanges, that may adversely impact product differentiation and pricing.
Other technological changes may present competitive risks. For example, innovations, such as telematics and other usage
- based methods of
determining premiums, can impact product design and pricing and may become an increasingly important competitive factor. Other potential
technological changes, such as driverless cars or technologies that facilitate ride or home sharing, could disrupt the demand for our products from
current customers, create coverage issues or impact the frequency or severity of losses, and we may not be able to respond effectively. In addition,
our competitive position could be impacted by our ability to deploy, in a cost effective manner, technology that collects and analyzes a wide
variety of data points (so
- called "big data" analysis) to make underwriting or other decisions. See also "Our business success and profitability
depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology" below.
In recent years, we have undertaken various actions to improve our underwriting margins on many of our insurance products, and competitive
dynamics may impact the success of these efforts. These efforts include seeking improved rates, as well as improved terms and conditions, and
also include other initiatives, such as reducing operating expenses and acquisition costs. These efforts may not continue to be successful and/or
may result in lower retention and new business levels and therefore lower business volumes. In addition, if our underwriting is not effective, further
efforts to increase rates could also lead to "adverse selection", whereby accounts retained have higher losses, and are less profitable, than
accounts lost. For more detail, see "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook."
In particular, in our Agency Automobile line of business, we have undertaken various actions to improve our underwriting margins, which
have been, and may continue to be, negatively impacted by various factors. See "Item 1—Business—Personal Insurance—Competition" above for
a description of some of these actions, including the offer of a new, more competitively
- priced product. These factors include (i) changes in
customer preferences and demand for direct distribution channels, (ii) utilization of comparative rating technologies by agents and/or technology
companies and (iii) other technological changes, as described above. If our strategies to increase profitability in the Agency Automobile line of
business are not effective, we may need to explore other actions or initiatives to improve our competitive position and profitability in this line of
business.
61