Annual Report 2005 - Chubb Group of Insurance Companies

equirements can impact the P&C Group's ability to change rates, particularly with respect to personal
lines products such as automobile and homeowners insurance, without prior regulatory approval even
where the current rates are inadequate to the assumed risk. However, in certain states, prior regulatory
approval of rates is not required for most lines of insurance that the P&C Group underwrites.
Subject to regulatory requirements, the P&C Group's management determines the prices charged
for its policies based on a variety of factors including loss and loss adjustment expense experience,
inÖation, anticipated changes in the legal environment, both judicial and legislative, and tax law and
rate changes. Methods for arriving at prices vary by type of business, exposure assumed and size of risk.
Underwriting proÑtability is aÅected by the accuracy of these assumptions, by the willingness of
insurance regulators to approve changes in those rates that they control and by such other matters as
underwriting selectivity and expense control.
In all states, insurers authorized to transact certain classes of property and casualty insurance are
required to become members of an insolvency fund. In the event of the insolvency of a licensed
insurer writing a class of insurance covered by the fund in the state, companies in the P&C Group,
together with the other fund members, are assessed in order to provide the funds necessary to pay
certain claims against the insolvent insurer. Generally, fund assessments are proportionately based on
the members' written premiums for the classes of insurance written by the insolvent insurer. In certain
states, the P&C Group can recover a portion of these assessments through premium tax oÅsets and
policyholder surcharges. In 2005, assessments of the members of the P&C Group amounted to
$10 million. The amount of future assessments cannot be reasonably estimated.
Insurance regulation in certain states requires the companies in the P&C Group, together with
other insurers operating in the state, to participate in assigned risk plans, reinsurance facilities and
joint underwriting associations, which are mechanisms that generally provide applicants with various
basic insurance coverages when they are not available in voluntary markets. Such mechanisms are
most prevalent for automobile and workers' compensation insurance, but a majority of states also
mandate that insurers, such as the P&C Group, participate in Fair Plans or Windstorm Plans, which
oÅer basic property coverages to insureds where not otherwise available. Some states also require
insurers to participate in facilities that provide homeowners, crime and other classes of insurance
where periodic market constrictions may occur. Participation is based upon the amount of a
company's voluntary written premiums in a particular state for the classes of insurance involved.
These involuntary market plans generally are underpriced and produce unproÑtable underwriting
results.
In several states, insurers, including members of the P&C Group, participate in market assistance
plans. Typically, a market assistance plan is voluntary, of limited duration and operates under the
supervision of the insurance commissioner to provide assistance to applicants unable to obtain
commercial and personal liability and property insurance. The assistance may range from identifying
sources where coverage may be obtained to pooling of risks among the participating insurers.
Although the federal government and its regulatory agencies generally do not directly regulate
the business of insurance, federal initiatives often have an impact on the business in a variety of ways.
Current and proposed federal measures that may signiÑcantly aÅect the P&C Group's business and the
market as a whole include federal terrorism insurance, asbestos liability reform measures, tort reform,
corporate governance including the increasing focus on public companies and public accounting Ñrms,
ergonomics, health care reform including the containment of medical costs, medical malpractice
reform and patients' rights, privacy, e-commerce, international trade, federal regulation of insurance
companies and the taxation of insurance companies.
Companies in the P&C Group are also aÅected by a variety of state and federal legislative and
regulatory measures as well as by decisions of their courts that deÑne and extend the risks and beneÑts
for which insurance is provided. These include: redeÑnitions of risk exposure in areas such as water
damage, including mold; products liability and commercial general liability; extension and protection
of employee beneÑts, including workers' compensation and disability beneÑts; and credit scoring.
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