The Hartford 2015 Annual Report Download - page 45

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Reserving Methodology
(See Reserving for Asbestos and Environmental Claims within Property & Casualty Other Operations for a discussion of how
A&E reserves are set)
How Reserves are Set
Reserves are set by line of business within the various segments. A single line of business may be written in more than one segment.
Case reserves are established by a claims handler on each individual claim and are adjusted as new information becomes known during
the course of handling the claim. Lines of business for which loss data (e.g., paid losses and case reserves) emerge (i.e., is reported) over
a long period of time are referred to as long-tail lines of business. Lines of business for which loss data emerge more quickly are referred
to as short-tail lines of business. The Company’s shortest-tail lines of business are property and auto physical damage. The longest tail
lines of business include workers’ compensation, general liability, professional liability and assumed reinsurance. For short-tail lines of
business, emergence of paid loss and case reserves is credible and likely indicative of ultimate losses. For long-tail lines of business,
emergence of paid losses and case reserves is less credible in the early periods and, accordingly, may not be indicative of ultimate losses.
The Company’s reserving actuaries regularly review reserves for both current and prior accident years using the most current claim data.
For most lines of business, these reserve reviews incorporate a variety of actuarial methods and judgments and involve rigorous analysis.
These selections incorporate input, as judged by the reserving actuaries to be appropriate, from claims personnel, pricing actuaries and
operating management on reported loss cost trends and other factors that could affect the reserve estimates. Most reserves are reviewed
fully each quarter, including loss and loss adjustment expense reserves for property, auto physical damage, auto liability, package
business, workers’ compensation, most general liability and professional liability. Other reserves are reviewed semi-annually (twice per
year) or annually. These include, but are not limited to, reserves for losses incurred in accident years older than twelve and twenty years,
for Personal and Commercial Lines, respectively, bond, assumed reinsurance, latent exposures, such as construction defects, and
unallocated loss adjustment expense. For reserves that are reviewed semi-annually or annually, management monitors the emergence of
paid and reported losses in the intervening quarters to either confirm that the estimate of ultimate losses should not change or, if
necessary, perform a reserve review to determine whether the reserve estimate should change.
An expected loss ratio is used in initially recording the reserves for both short-tail and long-tail lines of business. This expected loss ratio
is determined through a review of prior accident years’ loss ratios and expected changes to earned pricing, loss costs, mix of business,
ceded reinsurance and other factors that are expected to impact the loss ratio for the current accident year. For short-tail lines, IBNR for
the current accident year is initially recorded as the product of the expected loss ratio for the period, earned premium for the period and
the proportion of losses expected to be reported in future calendar periods for the current accident period. For long-tailed lines, IBNR
reserves for the current accident year are initially recorded as the product of the expected loss ratio for the period and the earned
premium for the period, less reported losses for the period.
In addition to the expected loss ratio, the actuarial techniques or methods used primarily include paid and reported loss development and
frequency / severity techniques as well as the Bornhuetter-Ferguson method (a combination of the expected loss ratio and paid
development or reported development method). Within any one line of business, the methods that are given more influence vary based
primarily on the maturity of the accident year, the mix of business and the particular internal and external influences impacting the
claims experience or the methods. The output of the reserve reviews are reserve estimates that are referred to herein as the “actuarial
indication”.
Most of the Company’s property and casualty insurance product reserves are not discounted. However, the Company has discounted
liabilities funded through structured settlements and has discounted certain reserves for indemnity payments due to permanently disabled
claimants under workers’ compensation policies. For further discussion of these discounted liabilities, see Note 10 - Reserves for Future
Policy Benefits and Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
As of December 31, 2015 and 2014, U.S. property and casualty insurance product reserves for losses and loss adjustment expenses, net
of reinsurance recoverables, reported under U.S. GAAP were approximately equal to net reserves reported on a statutory basis. Under
U.S. GAAP, liabilities for unpaid losses for permanently disabled workers’ compensation claimants are discounted at rates that are no
higher than risk-free interest rates in effect at the time the claims are incurred and which can vary from the statutory discount rates set by
regulators. In addition, a portion of the U.S. GAAP provision for uncollectible reinsurance is not recognized under statutory accounting,
largely offsetting the difference in discounting.
Provided below is a general discussion of which methods are preferred by line of business. Because the actuarial estimates are generated
at a much finer level of detail than line of business (e.g., by distribution channel, coverage, accident period), this description should not
be assumed to apply to each coverage and accident year within a line of business. Also, as circumstances change, the methods that are
given more influence will change.