The Hartford 2012 Annual Report Download - page 46

Table of Contents
Current trends contributing to reserve uncertainty
The Hartford is a multi-line company in the property and casualty insurance business. The Hartford is therefore subject to reserve uncertainty stemming from
a number of conditions, including but not limited to those noted above, any of which could be material at any point in time. Certain issues may become more
or less important over time as conditions change. As various market conditions develop, management must assess whether those conditions constitute a long-
term trend that should result in a reserving action (i.e., increasing or decreasing the reserve).
Within Property & Casualty Commercial and Property & Casualty Other Operations, the Company has exposure to claims asserted for bodily injury as a
result of long-term or continuous exposure to harmful products or substances. Examples include, but are not limited to, pharmaceutical products, silica and
lead paint. The Company also has exposure to claims from construction defects, where property damage or bodily injury from negligent construction is
alleged. In addition, the Company has exposure to claims asserted against religious institutions and other organizations relating to molestation or abuse. Such
exposures may involve potentially long latency periods and may implicate coverage in multiple policy periods. These factors make reserves for such claims
more uncertain than other bodily injury or property damage claims. With regard to these exposures, the Company is monitoring trends in litigation, the external
environment, the similarities to other mass torts and the potential impact on the Company’s reserves.
In Consumer Markets, reserving estimates are generally less variable than for the Company’s other property and casualty segments because of the coverages
having relatively shorter periods of loss emergence. Estimates, however, can still vary due to a number of factors, including interpretations of frequency and
severity trends and their impact on recorded reserve levels. Severity trends can be impacted by changes in internal claim handling and case reserving practices
in addition to changes in the external environment. These changes in claim practices increase the uncertainty in the interpretation of case reserve data, which
increases the uncertainty in recorded reserve levels. In addition, the introduction of new products has led to a different mix of business by type of insured than
the Company experienced in the past. Such changes in mix increase the uncertainty of the reserve projections, since historical data and reporting patterns may
not be applicable to the new business.
In standard commercial lines, workers’ compensation is the Company’s single biggest line of business and the line of business with the longest pattern of loss
emergence. Medical costs make up more than 50% of workers’ compensation payments. As such, reserve estimates for workers’ compensation are
particularly sensitive to changes in medical inflation, the changing use of medical care procedures and changes in state legislative and regulatory environments.
In addition, a changing economic environment can affect the ability of an injured worker to return to work and the length of time a worker receives disability
benefits. The Company has recently experienced a sharp increase in workers’ compensation claim frequency, while only seeing a partial offset from
moderating severity trends. These factors increase the uncertainty in the estimate of reserves.
In specialty lines, many lines of insurance are “long-tail”, including large deductible workers’ compensation insurance, as such, reserve estimates for these
lines are more difficult to determine than reserve estimates for shorter-tail lines of insurance. Estimating required reserve levels for large deductible workers’
compensation insurance is further complicated by the uncertainty of whether losses that are attributable to the deductible amount will be paid by the insured; if
such losses are not paid by the insured due to financial difficulties, the Company would be contractually liable. Another example of reserve variability relates
to reserves for directors’ and officers’ insurance. There is potential volatility in the required level of reserves due to the continued uncertainty regarding the
number and severity of class action suits, including uncertainty regarding the Company’s exposure to losses arising from the collapse of the sub-prime
mortgage market. Additionally, the Company’s exposure to losses under directors’ and officers’ insurance policies is primarily in excess layers, making
estimates of loss more complex. The recent financial market turmoil has increased the number of shareholder class action lawsuits against our insureds or
their directors and officers and this trend could continue for some period of time.
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