The Hartford 2012 Annual Report Download - page 95

Table of Contents
Reinsurance for Terrorism
For the risk of terrorism, private sector catastrophe reinsurance capacity is generally limited and largely unavailable for terrorism losses caused by nuclear,
biological, chemical or radiological weapons attacks. As such, the Company's principal reinsurance protection against large-scale terrorist attacks is the
coverage currently provided through the TRIPRA. On December 26, 2007, the President signed TRIPRA extending the Terrorism Risk Insurance Act of 2002
(“TRIA”) through the end of 2014. TRIPRA provides a backstop for insurance-related losses resulting from any “act of terrorism” certified by the Secretary of
the Treasury, in concurrence with the Secretary of State and Attorney General, that result in industry losses in excess of $100. In addition, TRIPRA revised
the TRIA definition of a certified “act of terrorism” by removing the requirement that an act be committed “on behalf of any foreign person or foreign interest.”
As a result, domestic acts of terrorism can now be certified as “acts of terrorism” under the program, subject to the other requirements of TRIPRA. Under the
program, in any one calendar year, the federal government would pay 85% of covered losses from a certified act of terrorism after an insurer's losses exceed
20% of the Company's eligible direct commercial earned premiums of the prior calendar year up to a combined annual aggregate limit for the federal
government and all insurers of $100 billion. The Company's estimated deductible under the program is $1.2 billion for 2013. If an act of terrorism or acts of
terrorism result in covered losses exceeding the $100 billion annual industry aggregate limit, a future Congress would be responsible for determining how
additional losses in excess of $100 billion will be paid.
Among other items, TRIPRA required that the President's Working Group on Financial Markets (“PWG”) continue to perform an analysis regarding the long-
term availability and affordability of insurance for terrorism risk. Among the findings detailed in the PWG's initial report, released October 2, 2006, were that
the high level of uncertainty associated with predicting the frequency of terrorist attacks, coupled with the unwillingness of some insurance policyholders to
purchase insurance coverage, makes predicting long-term development of the terrorism risk market difficult, and that there is likely little potential for future
market development for NBCR coverage. The January 2011 PWG report notes some improvements in capacity and modeling, but also noted that take-up rates
for terrorism coverage remained relatively flat over the past three years and that insurers remain uncertain about the ability of models to predict the frequency
and severity of terrorist attacks. With respect to NBCR coverage, a December 2008 study by the U.S. Government Accountability Office (“GAO”) found that
property and casualty insurers still generally seek to exclude NBCR coverage from their commercial policies when permitted. However, while nuclear,
pollution and contamination exclusions are contained in many property and liability insurance policies, the GAO report concluded that such exclusions may
be subject to challenges in court because they were not specifically drafted to address terrorist attacks. Furthermore, workers compensation policies generally
have no exclusion or limitations. The GAO found that commercial property and casualty policyholders, including companies that own high-value properties in
large cities, generally reported that they could not obtain NBCR coverage. Commercial property and casualty insurers generally remain unwilling to offer
NBCR coverage because of uncertainties about the risk and the potential for catastrophic losses.
Reinsurance Recoverables
Reinsurance Security
To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance, management and operational
quality of each potential reinsurer. Through this process, the Company maintains a centralized list of reinsurers approved for participation in reinsurance
transactions. Only reinsurers approved through this process are eligible to participate in new reinsurance transactions. The Company's approval designations
reflect the differing credit exposure associated with various classes of business. Participation eligibility is categorized based upon the nature of the risk
reinsured, including the expected liability payout duration. In addition to defining participation eligibility, the Company regularly monitors credit risk exposure
to each reinsurance counterparty and has established limits tiered by counterparty credit rating. For further discussions on how the Company manages and
mitigates third party credit risk, refer to the Credit Risk section.
Property and Casualty Insurance Product Reinsurance Recoverable
Property and casualty insurance product reinsurance recoverables represent loss and loss adjustment expense recoverable from a number of entities, including
reinsurers and pools. The following table shows the components of the gross and net reinsurance recoverable as of December 31, 2012 and 2011:
  
Paid loss and loss adjustment expenses $170 $ 153
Unpaid loss and loss adjustment expenses 2,852 2,884
  
Less: allowance for uncollectible reinsurance (268) (290)
  
94