Aetna 2008 Annual Report Download - page 25

Health care costs payable as of December 31, 2008 and 2007 consisted of the following products:
(Millions) 2008 2007
Commercial 1,936.6$ 1,881.8$
Medicare 390.9 227.9
Medicaid 65.7 67.7
Total health care costs payable 2,393.2$ 2,177.4$
Premium Deficiency Reserves
We recognize a premium deficiency loss when it is probable that expected future health care costs will exceed our
existing reserves plus anticipated future premiums and reinsurance recoveries. Anticipated investment income is
considered in the calculation of expected losses for certain contracts. Any such reserves established would normally
cover expected losses until the next policy renewal dates for the related policies. We did not have any material
premium deficiency reserves for our Health Care business at December 31, 2008 or 2007.
Other Insurance Liabilities
We establish insurance liabilities other than health care costs payable for benefit claims related to our Group
Insurance segment. We refer to these liabilities as other insurance liabilities. These liabilities relate to our life,
disability and long-term care products.
Life and Disability
The liabilities for our life and disability products reflect benefit claims that have been reported to us but not yet paid,
estimates of claims that have been incurred but not yet reported to us and future policy benefits earned under
insurance contracts. We develop these reserves and the related benefit expenses using actuarial principles and
assumptions that consider, among other things, discount, recovery and mortality rates (each discussed below).
Completion factors are also evaluated when estimating our reserves for claims incurred but not yet reported for life
products. We also consider the benefit payments from the U.S. Social Security Administration for which our
disability members may be eligible and which may offset our liability for disability claims (this is known as the
Social Security offset). Each period, we estimate these factors, to the extent relevant, based primarily on historical
data, and use these estimates to determine the assumptions underlying our reserve calculations. Given the extensive
degree of judgment and uncertainty used in developing these estimates, it is possible that our estimates could
develop either favorably or unfavorably.
The discount rate is the interest rate at which future benefit cash flows are discounted to determine the present value
of those cash flows. The discount rate we select is a critical estimate, because higher discount rates result in lower
reserves. We determine the discount rate based on the current and estimated future yield of the asset portfolio
supporting our life and disability reserves. If the discount rate we select in estimating our reserves is lower (higher)
than our actual future portfolio returns, our reserves may be higher (lower) than necessary. Our discount rates for
life and disability reserves at December 31, 2008 increased by .17% and .04%, respectively, when compared to the
rates used at December 31, 2007. Our discount rates for life and disability reserves at December 31, 2007 increased
by .06% and .12%, respectively, when compared to the rates used at December 31, 2006. The discount rates we
selected for disability and life reserves at December 31, 2008 and 2007 were higher than the rates we selected in the
previous year as a result of increasing investment yields on the portfolio of assets supporting these reserves. Based
on our historical experience, it is reasonably possible that the assumed discount rates for our life and disability
reserves may vary by plus or minus .25% from year to year. A .25% decrease in the discount rates selected for both
our life and disability reserves would have increased current and future life and disability benefit costs by
approximately $14 million pretax for 2008.
For disability claims and a portion of our life claims, we must estimate the timing of benefit payments, which takes
into consideration the maximum benefit period and the probabilities of recovery (i.e., recovery rate) or death (i.e.,
mortality rate) of the member. Benefit payments may also be affected by a change in employment status of a
disabled member, for example if the member returns to work on a part-time basis. Estimating the recovery and
mortality rates of our members is complex. Our actuaries evaluate our current and historical claim patterns, the
timing and amount of any Social Security offset (for disability only), as well as other factors including the relative
ages of covered members and the duration of each member’ s disability when developing these assumptions. For
disability reserves, if our actual recovery and mortality rates are lower (higher) than our estimates, our reserves will
be lower (higher) than required to cover future disability benefit payments. For certain life reserves, if the actual
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