The Hartford 2010 Annual Report Download - page 40

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Reserving for Asbestos and Environmental Claims within Other Operations
How A&E reserves are set
In establishing reserves for asbestos claims, the Company evaluates its insureds’ estimated liabilities for such claims using a ground-up
approach. The Company considers a variety of factors, including the jurisdictions where underlying claims have been brought, past,
pending and anticipated future claim activity, disease mix, past settlement values of similar claims, dismissal rates, allocated loss
adjustment expense, and potential bankruptcy impact.
Similarly, a ground-up exposure review approach is used to establish environmental reserves. The Company’ s evaluation of its
insureds’ estimated liabilities for environmental claims involves consideration of several factors, including historical values of similar
claims, the number of sites involved, the insureds’ alleged activities at each site, the alleged environmental damage at each site, the
respective shares of liability of potentially responsible parties at each site, the appropriateness and cost of remediation at each site, the
nature of governmental enforcement activities at each site, and potential bankruptcy impact.
Having evaluated its insureds’ probable liabilities for asbestos and/or environmental claims, the Company then evaluates its insureds’
insurance coverage programs for such claims. The Company considers its insureds’ total available insurance coverage, including the
coverage issued by the Company. The Company also considers relevant judicial interpretations of policy language and applicable
coverage defenses or determinations, if any.
Evaluation of both the insureds’ estimated liabilities and the Company’ s exposure to the insureds depends heavily on an analysis of the
relevant legal issues and litigation environment. This analysis is conducted by the Company’ s lawyers and is subject to applicable
privileges.
For both asbestos and environmental reserves, the Company also compares its historical direct net loss and expense paid and reported
experience, and net loss and expense paid and reported experience year by year, to assess any emerging trends, fluctuations or
characteristics suggested by the aggregate paid and reported activity.
Once the gross ultimate exposure for indemnity and allocated loss adjustment expense is determined for its insureds by each policy year,
the Company calculates its ceded reinsurance projection based on any applicable facultative and treaty reinsurance and the Company’ s
experience with reinsurance collections.
Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves
A number of factors affect the variability of estimates for asbestos and environmental reserves including assumptions with respect to the
frequency of claims, the average severity of those claims settled with payment, the dismissal rate of claims with no payment and the
expense to indemnity ratio. The uncertainty with respect to the underlying reserve assumptions for asbestos and environmental adds a
greater degree of variability to these reserve estimates than reserve estimates for more traditional exposures. While this variability is
reflected in part in the size of the range of reserves developed by the Company, that range may still not be indicative of the potential
variance between the ultimate outcome and the recorded reserves. The recorded net reserves as of December 31, 2010 of $2.14 billion
($1.80 billion and $339 for asbestos and environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.67
billion to $2.44 billion. The process of estimating asbestos and environmental reserves remains subject to a wide variety of
uncertainties, which are detailed in Note 12 of Notes to Consolidated Financial Statements. The Company believes that its current
asbestos and environmental reserves are appropriate. However, analyses of future developments could cause the Company to change its
estimates and ranges of its asbestos and environmental reserves, and the effect of these changes could be material to the Company’ s
consolidated operating results, financial condition and liquidity. Consistent with the Company’ s long-standing reserving practices, the
Company will continue to review and monitor its reserves in Other Operations regularly and, where future developments indicate, make
appropriate adjustments to the reserves.
Total Property and Casualty Insurance Product Reserves, Net of Reinsurance, Results
In the opinion of management, based upon the known facts and current law, the reserves recorded for the Company’ s property and
casualty businesses at December 31, 2010 represent the Company’ s best estimate of its ultimate liability for losses and loss adjustment
expenses related to losses covered by policies written by the Company. However, because of the significant uncertainties surrounding
reserves, and particularly asbestos exposures, it is possible that management’ s estimate of the ultimate liabilities for these claims may
change and that the required adjustment to recorded reserves could exceed the currently recorded reserves by an amount that could be
material to the Company’ s results of operations, financial condition and liquidity.