Travelers 2015 Annual Report Download - page 62

‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Reinsurance Recoverables.’’
The availability and cost of reinsurance are subject to prevailing market conditions, both in terms
of price and available capacity. The availability of reinsurance capacity can be impacted by general
economic conditions and conditions in the reinsurance market, such as the occurrence of significant
reinsured events. The availability and cost of reinsurance could affect our business volume and
profitability. In addition, certain countries, particularly in Europe, recently have been pressuring the
U.S. to reduce its regulatory requirements for U.S. ceding companies to obtain collateral from
reinsurers located outside the United States which, if successful, could make it more difficult for
U.S. companies, including us, to obtain sufficient collateral, if any, in such reinsurance arrangements.
Because of the risks set forth above, we may not be able to collect all amounts due to us from
reinsurers, and reinsurance coverage may not be available to us in the future at commercially
reasonable rates or at all, and/or life insurance companies may fail to make required annuity payments,
and thus our results of operations could be materially and adversely affected.
We are exposed to credit risk in certain of our business and investment operations including
reinsurance or structured settlements. In addition to exposure to credit risk related to our investment
portfolio and reinsurance recoverables (discussed above), we are exposed to credit risk in several other
areas of our business operations, including credit risk relating to policyholders, independent agents and
brokers.
We are exposed to credit risk in our surety insurance operations, where we guarantee to a third
party that our customer will satisfy certain performance obligations (e.g., a construction contract) or
certain financial obligations, including exposure to large customers who may have obligations to
multiple third parties. If our customer defaults, we may suffer losses and not be reimbursed by that
customer. In addition, it is customary practice in the surety business for multiple insurers to participate
as co-sureties on large surety bonds. Under these arrangements, the co-surety obligations are typically
joint and several, in which case we are also exposed to credit risk with respect to our co-sureties.
In addition, a portion of our business is written with large deductible insurance policies. Under
casualty insurance contracts with deductible features, we are obligated to pay the claimant the full
amount of the claim. We are subsequently reimbursed by the contractholder for the deductible amount,
and, as a result, we are exposed to credit risk to the policyholder. Moreover, certain policyholders
purchase retrospectively rated workers’ compensation policies (i.e., policies in which premiums are
adjusted after the policy period based on the actual loss experience of the policyholder during the
policy period). Retrospectively rated policies expose us to additional credit risk to the extent that the
adjusted premium is greater than the original premium.
Our efforts to mitigate the credit risk that we have to our insureds may not be successful. To
reduce such credit risk, we require certain insureds to post collateral for some or all of these
obligations, often in the form of pledged securities such as money market funds or letters of credit
provided by banks, surety bonds or cash. In cases where we receive pledged securities and the insureds
are unable to honor their obligations, we may be exposed to credit risk on the securities pledged and/or
the risk that our access to that collateral may be stayed during an insured’s bankruptcy. In cases where
we receive letters of credit from banks and the insureds are unable to honor their obligations, we are
exposed to the credit risk of the banks that issued the letters of credit.
In accordance with industry practice, when policyholders purchase insurance policies from us
through independent agents and brokers, the premiums relating to those policies are often paid to the
agents and brokers for payment to us. In most jurisdictions, the premiums will be deemed to have been
paid to us whether or not they are actually received by us. Consequently, we assume a degree of credit
risk associated with amounts due from independent agents and brokers.
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