Travelers 2015 Annual Report Download - page 146

policy limit and attachment point of coverage. The uncertainty surrounding reserves for small,
commercial insureds is typically less than the uncertainty for large commercial or financial institutions.
The high frequency, low severity nature of small commercial fidelity losses provides for stability in loss
estimates, whereas the low frequency, high severity nature of losses for large insureds results in a wider
range of ultimate loss outcomes. Actuarial techniques that rely on a stable pattern of loss development
are generally not applicable to low frequency, high severity claims.
Surety has certain components that are generally considered short tail coverages with short
reporting lags, although large individual construction and commercial surety contracts can result in a
long settlement tail, based on the length and complexity of the construction project(s) or commercial
transaction being insured. (Large construction projects can take many years to complete.) The
frequency of losses in surety generally correlates with economic cycles as the primary cause of surety
loss is the inability of an insured to fulfill its contractual obligations. The Company actively seeks to
mitigate this exposure to loss through disciplined risk selection, adherence to underwriting standards
and ongoing monitoring of contractor progress in significant construction projects. The volatility of
surety losses is generally related to the type of business performed by the insured, the type of bonded
obligation, the amount of limit exposed to loss and the amount of assets available to the insurer to
mitigate losses, such as unbilled contract funds, collateral, first and third party indemnity, and other
security positions of an insured’s assets. Certain classes of surety claims are very high severity, low
frequency in nature. These can include large construction contractors involved with one or multiple
large, complex projects as well as certain large commercial surety exposures. Other claim factors
affecting reserve variability of surety include litigation related to amounts owed by and due the insured
(e.g., salvage and subrogation efforts) and the results of financial restructuring of an insured.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the
required fidelity and surety reserves (beyond those included in the general discussion section) include:
Fidelity risk factors
• Type of business of insured
• Policy limit and attachment points
• Third-party claims
• Coverage litigation
• Complexity of claims
• Growth in insureds’ operations
Surety risk factors
• Economic trends, including the general level of construction activity
• Concentration of reserves in a relatively few large claims
• Type of business insured
• Type of obligation insured
• Cumulative limits of liability for insured
• Assets available to mitigate loss
• Defective workmanship/latent defects
• Financial strategy of insured
• Changes in statutory obligations
146