SGZ » Topics » Catastrophic events can have a significant impact on our financial and operational condition

This excerpt taken from the SGZ 10-K filed Mar 2, 2005.
Catastrophic events can have a significant impact on our financial and operational condition.
Results of property and casualty insurers are subject to weather and other conditions.  While one year may be relatively free of major weather or other disasters, another year may have numerous such events causing results to be materially worse than other years.

Our Insurance Subsidiaries have experienced catastrophe losses and we expect them to experience such losses in the future.  A catastrophic event or a series of catastrophic events could have a material adverse effect on the operating results and financial condition of the Insurance Subsidiaries, thereby limiting the ability of the Insurance Subsidiaries to pay dividends to Selective.

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Various natural and man-made events can cause catastrophes, including, but not limited to hurricanes, tornadoes, windstorms, earthquakes, hail, terrorism, explosions, severe winter weather and fires.  The frequency and severity of these catastrophes are inherently unpredictable.  The extent of losses from a catastrophe is determined by the severity of the event and the total amount of insured exposures in the area affected by the event.  Although catastrophes can cause losses in a variety of property and casualty lines, most of the catastrophe-related claims of our Insurance Subsidiaries historically have been related to commercial property and homeowners' coverages.

Our Insurance Subsidiaries seek to reduce their exposure to catastrophe losses through the purchase of catastrophe reinsurance.  Reinsurance, however, may prove inadequate if:
  • A major catastrophic loss exceeds the reinsurance limit or the reinsurers' financial capacity,

  • An Insurance Subsidiary pays a number of smaller catastrophic loss claims, which individually fall below the subsidiary's retention level, or

  • The modeling software used to analyze the Insurance Subsidiaries' risk proves inadequate.

Acts of terrorism could have a significant impact on our financial and operational condition.
On November 26, 2002, TRIA legislation was signed into law and will be in effect through December 31, 2005.  TRIA requires sharing the risk of future losses from terrorism between private insurers and the federal government, and is applicable to almost all commercial lines of insurance.  Insurance companies with direct commercial insurance exposure in the United States are required to participate in this program.  TRIA rescinded all previously approved exclusions for terrorism.  Policyholders for non- workers compensation policies have the option to accept or decline the terrorism coverage Selective offers in its policies, or negotiate other terms.  In 2004, approximately 90% of our commercial non-workers compensation policyholders purchased terrorism coverage.  The terrorism coverage is mandatory for all workers compensation primary policies.  In addition, ten of the twenty primary states Selective writes commercial property coverage in mandate the coverage of fire following an act of terrorism.  These provisions apply to new policies written after enactment of TRIA.  A terrorism act has to be certified by the Secretary of Treasury in order to be covered by TRIA.  TRIA limits the certified losses to "international terrorism" defined as an act committed on behalf of any foreign person or foreign interest where the damage from the event is in excess of $5 million and the event was not committed in the course of a war declared by the United States.  Terrorism acts related to the use of nuclear, biological or chemical (NBC) weapons are covered by TRIA provided that the Secretary of the Treasury certifies the loss.  Each participating insurance company will be responsible for paying out a certain amount in claims (a deductible) before federal assistance becomes available.  This deductible is based on a percentage of commercial lines direct earned premiums from the prior calendar year.  For losses above an insurer's deductible, the federal government will cover 90%, while the insurer contributes 10%.  Although the provisions of TRIA will serve to mitigate our exposure in the event of a large-scale terrorist attack, Selective's deductible is substantial.  In addition, it is uncertain whether TRIA will be extended past its current termination date.  Selective continues to monitor concentrations of risk and has purchased a separate terrorism treaty to supplement its protection to this highly unknown exposure.

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