Allstate 2008 Annual Report Download - page 112

Impacts of catastrophes and our catastrophe management strategy may adversely affect premium
growth
Due to our catastrophe risk management efforts, our short-term growth has been negatively impacted and
may continue to be negatively impacted if we take further actions. Homeowners premium growth rates and
retention could be more adversely impacted than we expect by adjustments to our business structure, size and
underwriting practices in markets with significant catastrophe risk exposure. In addition, due to the diminished
potential for cross-selling opportunities, new business growth in our auto lines could be lower than expected.
Unanticipated increases in the severity or frequency of claims may adversely affect our profitability and
financial condition
Changes in the severity or frequency of claims may affect the profitability of our Allstate Protection segment.
Changes in bodily injury claim severity are driven primarily by inflation in the medical sector of the economy and
litigation. Changes in auto physical damage claim severity are driven primarily by inflation in auto repair costs,
auto parts prices and used car prices. Changes in homeowner’s claim severity are driven by inflation in the
construction industry, in building materials and in home furnishings and by other economic and environmental
factors, including increased demand for services and supplies in areas affected by catastrophes. However,
changes in the level of the severity of claims are not limited to the effects of inflation and demand surge in these
various sectors of the economy. Increases in claim severity can arise from unexpected events that are inherently
difficult to predict. Examples of such events include a decision in 2001 by the Georgia Supreme Court that
diminished value coverage was included in auto policies under Georgia law and the emergence of mold-related
homeowners losses in the state of Texas during 2002. Although we pursue various loss management initiatives in
the Allstate Protection segment in order to mitigate future increases in claim severity, there can be no assurances
that these initiatives will successfully identify or reduce the effect of future increases in claim severity.
Our Allstate Protection segment may experience declines in claim frequency from time to time. The
short-term level of claim frequency we experience may vary from period to period and may not be sustainable
over the longer term. A spike in gas prices and a significant decline in miles driven, both of which occurred in
2008, are examples of factors leading to a short-term frequency change. A significant long-term increase in claim
frequency could have an adverse effect on our operating results and financial condition.
Actual claims incurred may exceed current reserves established for claims and may adversely affect our
operating results and financial condition
Recorded claim reserves in the Property-Liability business are based on our best estimates of losses, both
reported and incurred but not reported (‘‘IBNR’’), after considering known facts and interpretations of
circumstances. Internal factors are considered including our experience with similar cases, actual claims paid,
historical trends involving claim payment patterns, pending levels of unpaid claims, loss management programs,
product mix, and contractual terms. External factors are also considered which include but are not limited to law
changes, court decisions, changes to regulatory requirements and economic conditions. Because reserves are
estimates of the unpaid portion of losses that have occurred, including IBNR losses, the establishment of
appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The
ultimate cost of losses may vary materially from recorded reserves and such variance may adversely affect our
operating results and financial condition.
Predicting claim expense relating to asbestos, environmental, and other discontinued lines is inherently
uncertain and may have a material adverse effect on our operating results and financial condition
The process of estimating asbestos, environmental and other discontinued lines liabilities is complicated by
complex legal issues concerning, among other things, the interpretation of various insurance policy provisions and
whether those losses are, or were ever intended to be covered; and whether losses could be recoverable through
retrospectively determined premium, reinsurance or other contractual agreements. Asbestos-related bankruptcies
and other asbestos litigation are complex, lengthy proceedings that involve substantial uncertainty for insurers.
Actuarial techniques and databases used in estimating asbestos, environmental and other discontinued lines net
loss reserves may prove to be inadequate indicators of the extent of probable loss. Ultimate net losses from these
discontinued lines could materially exceed established loss reserves and expected recoveries and have a material
adverse effect on our operating results and financial condition.
Regulation limiting rate increases and requiring us to underwrite business and participate in loss
sharing arrangements may decrease our profitability
From time to time, political events and positions affect the insurance market, including efforts to suppress
rates to a level that may not allow us to reach targeted levels of profitability. For example, if Allstate Protection’s
loss ratio compares favorably to that of the industry, state regulatory authorities may impose rate rollbacks, require
us to pay premium refunds to policyholders, or resist or delay our efforts to raise rates even if the property and
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Risk Factors