Capital & Risk Management: Enterprise Risk Management

Integrating ERM with an effective internal control environment enables our ERM group to foster, lead and support an integrated, risk-based culture throughout the company. To that end, our ERM group:

• Identifies, evaluates and quantifies risks, their correlations and their interdependencies from all sources across the organization.
• Facilitates risk assessments and enhances the coordination of risk management across all categories of risk throughout the company.
• Develops enterprise-wide risk appetite/tolerance/limits.
• Maintains dynamic capital models to quantify and evaluate the company’s risk exposures and their related impact on the company’s risk/reward assessment, capital structure and future earnings potential.
• Works in partnership with key risk management leaders in different areas throughout the organization (such as underwriting, reserving, investments, credit, regulatory compliance and operations) to ensure coordinated cross-departmental risk management and governance.
• Works to enhance effective and credible risk modeling capabilities as part of the company’s overall effort to understand and manage its portfolio of risks to be within its risk appetite and tolerance.
• Provides capital model allocations to the company’s products and businesses and helps ensure capital efficiency in concert with regulatory and rating agency targets.

In addition, our ERM group leads the company’s annual Management Identification of Significant Risks (MISR) – a governance process through which senior risk and business leaders and various committees collaborate to identify the significant inherent and residual risks faced by Travelers. The MISR process assigns management responsibility for individual risks to senior corporate leaders and/or internal groups, committees and processes and assigns oversight responsibility to various Board Committees. The results of the MISR process are reviewed with the Risk and Audit Committees of the Board at least annually and is also reviewed by the Board as part of its annual review of the allocation of risk oversight among its committees.

As part of our ERM process, we use metrics and risk/reward analytics to actively evaluate and adjust our strategies, as well as to further support our long-term financial strategy and business objectives. For example, we use various analyses and methods, including proprietary and third-party computer modeling processes, to make underwriting and reinsurance decisions designed to manage the company’s exposure to catastrophic events. In addition to catastrophe modeling and analysis, we model and analyze our exposure to other extreme events. We also utilize proprietary and third-party computer modeling processes to evaluate capital adequacy. For more information, please see the Ethics & Responsible Business Practices section.

Our approach to ERM is reinforced by our compensation structure, which is designed to encourage a careful balance of risk and reward, both on an individual risk basis and on a companywide basis. Our compensation program also promotes and drives a long-term perspective to managing our business. This long-term perspective is especially important in the property and casualty insurance industry, where a short-term focus could create incentives for management to relax the company’s underwriting or investment standards to increase revenue and reported profit in the near term but could create excessive risk for shareholders over the longer term. Moreover, results in the property and casualty insurance industry can vary significantly when measured year to year because of a variety of factors, including the periodic occurrence of significant catastrophes. Accordingly, we believe that the right way to manage our business is with a long-term perspective, with an eye toward creating value over time. See our Proxy Statement for a comprehensive discussion of how our compensation program incorporates this long-term perspective.