Travelers 2015 Annual Report Download - page 52

United States, future actions or inactions of the United States government can also impact economic
conditions. For example, issues related to the U.S. Federal budget and taxes, implementation of the
Affordable Care Act and the regulatory environment have added to the uncertainty regarding economic
conditions generally.
If economic conditions deteriorate, or if financial markets experience significant disruption, it
could materially adversely affect our results of operations, financial position and/or liquidity. Several of
the risk factors discussed below identify risks that result from, or are exacerbated by, an economic
slowdown or financial disruption. These include risks discussed below related to our investment
portfolio, reinsurance arrangements, other credit exposures, our estimates of claims and claim
adjustment expense reserves, emerging claim and coverage issues, the competitive environment,
regulatory developments and the impact of rating agency actions. You should also refer to ‘‘Item 7—
Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ particularly
the ‘‘Outlook’’ section.
Many of these risks could materialize, and our financial results could be negatively impacted, even
after the end of an economic downturn or financial disruption. During or following an economic
downturn, lower levels of economic activity could reduce (and historically have reduced) exposure
changes at renewal. They also could adversely impact (and historically have adversely impacted) audit
premium adjustments, policy endorsements and mid-term cancellations after policies are written,
particularly in our business units within Business and International Insurance, which could adversely
impact our written premiums. An inflationary environment (which may follow government efforts to
stabilize the economy) may also, as we discuss below, adversely impact our loss costs and could
adversely impact the valuation of our investment portfolio. Finally, as a result of financial market
disruption, we may, as discussed below, face increased regulation.
If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the
estimated level of claims and claim adjustment expense reserves are necessary, our financial results
could be materially and adversely affected. Claims and claim adjustment expense reserves do not
represent an exact calculation of liability, but instead represent management estimates of what the
ultimate settlement and administration of claims will cost, generally utilizing actuarial expertise and
projection techniques, at a given accounting date.
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; adverse changes in loss cost trends,
including inflationary pressures on medical costs and auto and home repair costs; economic conditions
including general inflation; legal trends and legislative changes; and varying judgments and viewpoints
of the individuals involved in the estimation process, among others. The impact of many of these items
on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Claims and claim
adjustment expense reserve 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).
As discussed above, it is possible that steps taken by the federal government to stabilize the
economy could lead to higher inflation than we had anticipated, which could in turn lead to an increase
in our loss costs. The impact of inflation on loss costs could be more pronounced for those lines of
business that are considered ‘‘long tail,’’ such as general liability, as they require a relatively long period
of time to finalize and settle claims for a given accident year. In addition, a significant portion of claims
costs, including those in ‘‘long tail’’ lines of business, consists of medical costs. Healthcare reform
legislation and its implementation may significantly impact the availability, cost and allocation of
payments for medical services, and it is possible that, as a result, inflationary pressures in medical costs
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