The Hartford 2015 Annual Report Download - page 48

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The reserve estimation process includes assumptions about a number of factors in the internal and external environment. Across most
lines of business, the most important assumptions are future loss development factors applied to paid or reported losses to date. The
trend in loss costs is also a key assumption, particularly in the most recent accident years, where loss development factors are less
credible.
The following discussion includes disclosure of possible variation from current estimates of loss reserves due to a change in certain key
indicators of potential losses. Each of the impacts described below is estimated individually, without consideration for any correlation
among key indicators or among lines of business. Therefore, it would be inappropriate to take each of the amounts described below and
add them together in an attempt to estimate volatility for the Company’s reserves in total. For any one reserving line of business, the
estimated variation in reserves due to changes in key indicators is a reasonable estimate of possible variation that may occur in the
future, likely over a period of several calendar years. It is important to note that the variation discussed is not meant to be a worst-case
scenario, and therefore, it is possible that future variation may be more than the amounts discussed below.
Recorded reserves for auto liability, net of reinsurance, are approximately $2.1 billion across all lines, $1.4 billion of which is in
Personal Lines. Personal auto liability reserves are shorter-tailed than other lines of business (such as workers’ compensation) and,
therefore, less volatile. However, the size of the reserve base means that future changes in estimates could be material to the Company’s
results of operations in any given period. The key indicator for Personal Lines auto liability is the annual loss cost trend, particularly the
severity trend component of loss costs. A 2.5 point change in annual severity for the two most recent accident years would change the
estimated net reserve need by $80, in either direction. A 2.5 point change in annual severity is within the Company’s historical variation.
Recorded reserves for workers’ compensation, net of reinsurance, are approximately $9.0 billion. Loss development patterns are a key
indicator for this line of business, particularly for more mature accident years. Historically, loss development patterns have been
impacted by, among other things, medical cost inflation and other changes in loss cost trends. The Company has reviewed the historical
variation in paid loss development patterns. If the paid loss development patterns change by 2%, the estimated net reserve need would
change by $400, in either direction. A 2% change in paid loss development patterns is within the Company’s historical variation, as
measured by the variation around the average development factors as reported in statutory accident year reports.
Recorded reserves for general liability, net of reinsurance, are approximately $2.5 billion. Loss development patterns are a key indicator
for this line of business, particularly for more mature accident years. Historically, loss development patterns have been impacted by,
among other things, emergence of new types of claims (e.g., construction defect claims) or a shift in the mixture between smaller, more
routine claims and larger, more complex claims. The Company has reviewed the historical variation in reported loss development
patterns. If the reported loss development patterns change by 10%, the estimated net reserve need would change by $200, in either
direction. A 10% change in reported loss development patterns is within the Company’s historical variation, as measured by the variation
around the average development factors as reported in statutory accident year reports.
Reserving for Asbestos and Environmental Claims within Property & Casualty 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 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.