The Hartford 2015 Annual Report Download - page 47

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The final step in the reserve review process involves a comprehensive review by senior reserving actuaries who apply their judgment
and, in concert with senior management, determine the appropriate level of reserves based on the information that has been accumulated.
Numerous factors are considered in this process including, but not limited to, the assessed reliability of key loss trends and assumptions
that may be significantly influencing the current actuarial indications, pertinent trends observed over the recent past, the level of
volatility within a particular line of business, and the improvement or deterioration of actuarial indications in the current period as
compared to the prior periods. Total recorded net reserves, excluding asbestos and environmental, were 4.1% higher than the actuarial
indication of the reserves as of December 31, 2015.
For a discussion of changes to reserve estimates recorded in 2015, see Reserve Roll-forwards and Development included below in this
section.
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 Commercial Lines 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 Personal Lines, 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 and class plans 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. To the extent that payment patterns are impacted by increases or decreases in the frequency of
settlement payments, historical patterns would be less reliable, increasing the uncertainty around reserve estimates. 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.
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. Auto 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. 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. Additionally, the Company’s exposure to losses under directors’ and
officers’ insurance policies is primarily in excess layers, making estimates of loss more complex.
Impact of Changes in Key Assumptions on Reserve Volatility
As stated above, the Company’s practice is to estimate reserves using a variety of methods, assumptions and data elements. Within its
reserve estimation process for reserves other than asbestos and environmental, the Company does not consistently use statistical loss
distributions or confidence levels around its reserve estimate and, as a result, does not disclose reserve ranges.