Travelers 2015 Annual Report Download - page 135

To the extent a material change affecting the ultimate claim liability is known, such change is estimated
to the extent possible through an analysis of internal company data and, if available and when
appropriate, external data. Such a measurement is specific to the facts and circumstances of the
particular claim portfolio and the known change being evaluated. Significant structural changes to the
available data, product mix or organization can materially impact the reserve estimation process.
Informed judgment is applied throughout the reserving process. This includes the application of
various individual experiences and expertise to multiple sets of data and analyses. In addition to
actuaries, experts involved with the reserving process also include underwriting and claims personnel
and lawyers, as well as other company management. Therefore, management may have to consider
varying individual viewpoints as part of its estimation of claims and claim adjustment expense reserves.
It is also likely that during periods of significant change, such as a merger, consistent application of
informed judgment becomes even more complicated and difficult.
The variables discussed above in this general discussion have different impacts on reserve
estimation uncertainty for a given product line, depending on the length of the claim tail, the reporting
lag, the impact of individual claims and the complexity of the claim process for a given product line.
Product lines are generally classifiable as either long tail or short tail, based on the average length
of time between the event triggering claims under a policy and the final resolution of those claims.
Short tail claims are reported and settled quickly, resulting in less estimation variability. The longer the
time to final claim resolution, the greater the exposure to estimation risks and hence the greater the
estimation uncertainty.
A major component of the claim tail is the reporting lag. The reporting lag, which is the time
between the event triggering a claim and the reporting of the claim to the insurer, makes estimating
IBNR inherently more uncertain. In addition, the greater the reporting lag, the greater the proportion
of IBNR to the total claim liability for the product line. Writing new products with material reporting
lags can result in adding several years’ worth of IBNR claim exposure before the reporting lag exposure
becomes clearly observable, thereby increasing the risk associated with estimating the liabilities for
claims and claim adjustment expenses for such products. The most extreme example of claim liabilities
with long reporting lags are asbestos claims.
For some lines, the impact of large individual claims can be material to the analysis. These lines
are generally referred to as being ‘‘low frequency/high severity,’’ while lines without this ‘‘large claim’’
sensitivity are referred to as ‘‘high frequency/low severity.’’ Estimates of claim liabilities for low
frequency/high severity lines can be sensitive to the impact of a small number of potentially large
claims. As a result, the role of judgment is much greater for these reserve estimates. In contrast, for
high frequency/low severity lines the impact of individual claims is relatively minor and the range of
reasonable reserve estimates is likely narrower and more stable.
Claim complexity can also greatly affect the estimation process by impacting the number of
assumptions needed to produce the estimate, the potential stability of the underlying data and claim
process, and the ability to gain an understanding of the data. Product lines with greater claim
complexity, such as for certain surety and construction exposures, have inherently greater estimation
uncertainty.
Actuaries have to exercise a considerable degree of judgment in the evaluation of all these factors
in their analysis of reserves. The human element in the application of actuarial judgment is unavoidable
when faced with material uncertainty. Different actuaries may choose different assumptions when faced
with such uncertainty, based on their individual backgrounds, professional experiences and areas of
focus. Hence, the estimates selected by the various actuaries may differ materially from each other.
Lastly, significant structural changes to the available data, product mix or organization can also
materially impact the reserve estimation process. Events such as mergers increase the inherent
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