Travelers 2015 Annual Report Download - page 44

For example, if cumulative paid losses for a product line XYZ for
accident year 2004 were $100 as of December 31, 2004 (12 months
after the start of that accident year), then grew to $120 as of
December 31, 2005 (24 months after the start), the link ratio for
that accident year from 12 to 24 months would be 1.20. If the link
ratio for other recent accident years from 12 to 24 months for that
product line were also at or around 1.20, then the method would
assume a similar result for the most recent accident year, i.e., that it
too would have its cumulative paid losses grow 120% from the
12 month to 24 month valuation.
This is repeated for each age-to-age period into the future until the
age-to-age link ratios for future periods are assumed to be 1.0 (i.e.,
the age at which cumulative losses are assumed to have stopped
growing).
A given accident year’s cumulative losses are then projected to
ultimate by multiplying current cumulative losses by successive age-
to-age link ratios up to that future age where growth is expected to
end. For example, if growth is expected to end at 60 months, then
the ultimate indication for an accident year with cumulative losses
at 12 months equals those losses times a 12 to 24 month link ratio,
times a 24 to 36 month link ratio, times a 36 to 48 month link ratio,
times a 48 to 60 month link ratio.
Advanced applications of the method include adjustments for
changing conditions during the historical period and anticipated
changes in the future.
Pool..................... An organization of insurers or reinsurers through which particular
types of risks are underwritten with premiums, losses and expenses
being shared in agreed-upon percentages.
Premiums................. The amount charged during the year on policies and contracts
issued, renewed or reinsured by an insurance company.
Probable maximum loss (PML) . The maximum amount of loss that the Company would be expected
to incur on a policy if a loss were to occur, giving effect to
collateral, reinsurance and other factors.
Property insurance .......... Insurance that provides coverage to a person or business with an
insurable interest in tangible property for that person’s or business’s
property loss, damage or loss of use.
Quota share reinsurance ...... Reinsurance wherein the insurer cedes an agreed-upon fixed
percentage of liabilities, premiums and losses for each policy
covered on a pro rata basis.
Rates .................... Amounts charged per unit of insurance.
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