Travelers 2015 Annual Report Download - page 133

in the future, based on the Company’s assessment of facts and circumstances then known, review of
historical settlement patterns, estimates of trends in claims severity and frequency, expected
interpretations of legal theories of liability and other factors. In establishing gross claims and claim
adjustment expense reserves, the Company also considers salvage and subrogation. Estimated recoveries
from reinsurance are included in ‘‘Reinsurance Recoverables’’ as an asset on the Company’s
consolidated balance sheet. The claims and claim adjustment expense reserves are reviewed regularly by
qualified actuaries employed by the Company.
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, changes in individuals involved in the
reserve estimation process, economic inflation, legal 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. 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). Informed judgment is applied throughout the
process, including the application of various individual experiences and expertise to multiple sets of
data and analyses. The Company continually refines its estimates in a regular ongoing process as
historical loss experience develops and additional claims are reported and settled. The Company
rigorously attempts to consider all significant facts and circumstances known at the time claims and
claim adjustment expense reserves are established. Due to the inherent uncertainty underlying these
estimates including, but not limited to, the future settlement environment, final resolution of the
estimated liability for claims and claim adjustment expenses may be higher or lower than the related
claims and claim adjustment expense reserves at the reporting date. Therefore, actual paid losses, as
claims are settled in the future, may be materially different than the amount currently recorded—
favorable or unfavorable.
Because establishment of claims and claim adjustment expense reserves is an inherently uncertain
process involving estimates, currently established claims and claim adjustment expense reserves may
change. The Company reflects adjustments to the reserves in the results of operations in the period the
estimates are changed.
There are also additional risks which impact the estimation of ultimate costs for catastrophes. For
example, the estimation of reserves related to hurricanes, tornadoes and other catastrophic events can
be affected by the inability of the Company and its insureds to access portions of the impacted areas,
the complexity of factors contributing to the losses, the legal and regulatory uncertainties, including the
interpretation of policy terms and conditions, and the nature of the information available to establish
the 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; estimating the impact of demand surge, infrastructure disruption, fraud, the effect of mold
damage and business interruption costs; and reinsurance collectibility. The timing of a catastrophe, such
as at or near the end of a reporting period, can also affect the information available to the Company in
estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as
actual claims emerge.
A portion of the Company’s gross claims and claim adjustment expense reserves (totaling
$2.36 billion at December 31, 2015) are for asbestos and environmental claims and related litigation.
While the ongoing review of asbestos and environmental claims and associated liabilities considers the
inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability and the risks
inherent in complex litigation and other uncertainties, in the opinion of the Company’s management, it
is possible that the outcome of the continued uncertainties regarding these claims could result in
liability in future periods that differs from current reserves by an amount that could be material to the
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