The Hartford 2008 Annual Report Download - page 198

Table of Contents
Impact of Re-estimates
As explained in connection with the Company’s discussion of Critical Accounting Estimates, the establishment of property
and casualty reserves is an estimation process, using a variety of methods, assumptions and data elements. Ultimate losses
may vary significantly from the current estimates. Many factors can contribute to these variations and the need to change the
previous estimate of required reserve levels. Subsequent changes can generally be thought of as being the result of the
emergence of additional facts that were not known or anticipated at the time of the prior reserve estimate and/or changes in
interpretations of information and trends.
The table below shows the range of annual reserve re-estimates experienced by The Hartford over the past four years. The
amount of prior accident year development (as shown in the reserve rollforward) for a given calendar year is expressed as a
percent of the beginning calendar year reserves, net of reinsurance. The percentage relationships presented are significantly
influenced by the facts and circumstances of each particular year and by the fact that only the last four years are included in
the range. Accordingly, these percentages are not intended to be a prediction of the range of possible future variability. See
“Impact of key assumptions on reserve volatility” within Critical Accounting Estimates for further discussion of the
potential for variability in recorded loss reserves.
Personal Small Middle Specialty Ongoing Other Total
Lines Commercial Market Commercial Operations Operations P&C
Range of prior
accident year
development for
the four years
ended
December 31,
2008 [1] [2] (5.2) – (0.2) (6.5) – (1.0) (3.1) – 1.6 (1.8) – 3.1 (2.5) – 0.3 3.1 – 7.4 (1.2) – 1.5
[1] Bracketed prior accident year development indicates favorable development. Unbracketed amounts represent
unfavorable development.
[2] Over the past ten years, reserve re-estimates for total Property & Casualty ranged from (1.3)% to 21.5%. Excluding
the reserve strengthening for asbestos and environmental reserves, over the past ten years reserve re-estimates for total
Property & Casualty ranged from (3.0)% to 1.6%.
The potential variability of the Company’s Property & Casualty reserves would normally be expected to vary by segment
and the types of loss exposures insured by those segments. Illustrative factors influencing the potential reserve variability for
each of the segments are discussed under Critical Accounting Estimates.
Risk Management Strategy
The Hartford’s property and casualty operations have processes to manage risk to natural disasters, such as hurricanes and
earthquakes, and other perils, such as terrorism. The Hartford’s risk management processes include, but are not limited to,
disciplined underwriting protocols, exposure controls, sophisticated risk modeling, risk transfer, and capital management
strategies.
In managing risk, The Hartford’s management processes involve establishing underwriting guidelines for both individual
risks, including individual policy limits, and in aggregate, including aggregate exposure limits by geographic zone and peril.
The Company establishes risk limits and actively monitors the risk exposures as a percent of Property & Casualty statutory
surplus. For natural catastrophe perils, the Company generally limits its estimated loss to natural catastrophes from a single
250-year event prior to reinsurance to less than 30% of statutory surplus of the Property & Casualty operations and its
estimated loss to natural catastrophes from a single 250-year event after reinsurance to less than 15% of statutory surplus of
the Property & Casualty operations. From time to time, the estimated loss to natural catastrophes from a single 250-year
event prior to reinsurance may fluctuate above or below 30% of statutory surplus due to changes in modeled loss estimates,
exposures, or statutory surplus. Currently, the Company’s estimated pre-tax loss to a single 250-year natural catastrophe
event prior to reinsurance is 31% of statutory surplus of the Property & Casualty operations and the Company’s estimated
pre-tax loss net of reinsurance is less than 15% of statutory surplus of the Property & Casualty operations. For terrorism, the
Company monitors its exposure in major metropolitan areas to a single-site conventional terrorism attack scenario, and
manages its potential estimated loss, including exposures resulting from the Company’s Group Life operations, to less than
$1.3 billion, which is approximately 10% of the combined statutory surplus of the Life and Property & Casualty operations
as of December 31, 2008. Among the 251 locations specifically monitored by the Company, the largest estimated modeled
loss arising from a single event is approximately $1.2 billion. The Company monitors exposures monthly and employs both
internally developed and vendor-licensed loss modeling tools as part of its risk management discipline.
Use of Reinsurance
In managing risk, The Hartford utilizes reinsurance to transfer risk to well-established and financially secure reinsurers.
Reinsurance is used to manage aggregations of risk as well as specific risks based on accumulated property and casualty
liabilities in certain geographic zones. All treaty purchases related to the Company’s property and casualty operations are
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009