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Can't say for the N.America XM solution but for over in UK :

Traffic avoidance works off the FM radio listening to RDS signals,
It'll pop up a silent note on the nav display saying when it's recommending a different route,
It won't tell you using sound that it thinks staying on the current road would be a Bad Idea,
But it will tell you "Traffic ahead" or "Slow traffic" (my memory wasn't turned on when I heard it cos I was already keeping an eye on slow traffic) when it thinks there's a problem.

If the system is active, there should be a "TMC" logo on the left hand side of the nav display if it's receiving traffic info. Bit disappointed that it didn't give an audio alert when a different route was recommended but I was very impressed at my ETA being the same before diverting as after diverting :)

The information systems have significant differences though between UK and US spec, so where it gets its intel from isn't the same. Might be worth diving through the manual(s) to see if there's a hidden setting that enables traffic alerts ...
 

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PS I shall tidy that post up later and add the carriage returns when I'm away from a stone age browser ... We still use IE6 at work !

Edit - sorted. IE6 at work wouldn't let me edit the post, it kept giving the whirly circle symbol. Worked fine at home with Firefox so no need for a note in the "Quirks with new forum" thread :)
 
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