Travelers 2015 Annual Report Download - page 141

Commercial Property
Commercial property is generally considered a short tail line with a simpler and faster claim
reporting and adjustment process than liability coverages, and less uncertainty in the reserve setting
process (except for more complex business interruption claims). It is generally viewed as a moderate
frequency, low to moderate severity line, except for catastrophes and coverage related to large
properties. The claim reporting and settlement process for property coverage claim reserves is generally
restricted to the insured and the insurer. Overall, the claim liabilities for this line create a low
estimation risk, except possibly for catastrophes and business interruption claims.
Commercial property reserves are typically analyzed in two components, one for catastrophic or
other large single events, and another for all other events. Examples of common risk factors, or
perceptions thereof, that could change and, thus, affect the required property reserves (beyond those
included in the general discussion section) include:
Commercial property risk factors
• Physical concentration of policyholders
• Availability and cost of local contractors
• For the more severe catastrophic events, ‘‘demand surge’’ inflation, which refers to significant
short-term increases in building material and labor costs due to a sharp increase in demand for
those materials and services
• Local building codes
• Amount of time to return property to full usage (for business interruption claims)
• Frequency of claim re-openings on claims previously closed
• Court interpretation of policy provisions (such as occurrence definition, or wind versus flooding)
• Lags in reporting claims (e.g., winter damage to summer homes, hidden damage after an
earthquake, hail damage to roofs and/or equipment on roofs)
• Court or legislative changes to the statute of limitations
Commercial property book of business risk factors
• Policy provisions mix (e.g., deductibles, policy limits, endorsements)
• Changes in underwriting standards
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a
change in one or more risk factors could have on reserves for property, a 1% increase (decrease) in
incremental paid loss development for each future calendar year could result in a 1.1% increase
(decrease) in claims and claim adjustment expense reserves.
Historically, the one-year change in the reserve estimate for this product line over the last nine
years has varied from 25% to 5% (averaging 17%) for the Company, and from 14% to 5%
(averaging 8%) for the industry overall. The Company’s year-to-year changes are driven by, and are
based on, observed events during the year. The Company believes that its range of historical outcomes
is illustrative of reasonably possible one-year changes in reserve estimates for this product line.
Commercial property reserves represent approximately 2% of the Company’s total claims and claim
adjustment expense reserves.
Since commercial property is considered a short tail coverage, the one year change for commercial
property can be more volatile than that for the longer tail product lines. This is due to the fact that the
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