Aetna 2008 Annual Report Download - page 58

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our estimate of payments we will make on claims reported to us but not yet paid and for health care services
rendered to members but not yet reported to us as of the balance sheet date (collectively, “IBNR”). Also included
in these estimates is the cost of services that will continue to be rendered after the balance sheet date if we are
obligated to pay for such services in accordance with contractual or regulatory requirements. Such estimates are
developed using actuarial principles and assumptions which consider, among other things, historical and projected
claim submission and processing patterns, medical cost trends, historical utilization of health care services, claim
inventory levels, changes in membership and product mix, seasonality and other relevant factors. We reflect
changes in these estimates in health care costs in our results of operations. Capitation costs represent contractual
monthly fees paid to participating physicians and other medical providers for providing medical care, regardless of
the medical services provided to the member. Less than 6% of our health care costs related to capitated
arrangements in each of the last three years. Amounts due under risk-sharing arrangements are based on the terms
of the underlying contracts with the providers and consider claims experience under the contracts through the
balance sheet date.
Future policy benefits
Future policy benefits consist primarily of reserves for limited payment pension and annuity contracts in the Large
Case Pensions business and long-duration group life and long-term care insurance contracts in the Group Insurance
business. Reserves for limited payment contracts are computed in accordance with GAAP, with consideration
given to actuarial principles and are based upon assumptions reflecting anticipated mortality, retirement, expense
and interest rate experience. Such assumptions generally vary by plan, year of issue and policy duration. Assumed
interest rates on such contracts ranged from 2.0% to 11.3% in both 2008 and 2007. We periodically review
mortality assumptions against both industry standards and our experience. Reserves for long-duration group life
and long-term care contracts represent our estimate of the present value of future benefits to be paid to or on behalf
of policyholders less the present value of future net premiums. Assumed interest rates on such contracts ranged
from 2.5% to 8.8% in both 2008 and 2007. Our estimate of the present value of future benefits under such contracts
is based upon mortality, morbidity and interest rate assumptions.
Unpaid claims
Unpaid claims consist primarily of reserves associated with certain short-duration group disability and term life
insurance contracts in the Group Insurance business, including an estimate for IBNR as of the balance sheet date.
Reserves associated with certain short-duration group disability and term life insurance contracts are based upon
our estimate of the present value of future benefits, which is based on assumed investment yields and assumptions
regarding mortality, morbidity and recoveries from the U.S. Social Security Administration. We develop our
reserves for IBNR using actuarial principles and assumptions which consider, among other things, contractual
requirements, claim incidence rates, claim recovery rates, seasonality and other relevant factors. We discount
certain claim liabilities related to group long-term disability and premium waiver contracts. The discounted unpaid
claim liabilities were $1.6 billion and $1.5 billion at December 31, 2008 and 2007, respectively. The undiscounted
value of these unpaid claim liabilities was $2.5 billion and $2.4 billion at December 31, 2008 and 2007,
respectively. The discount rates generally reflect our expected investment returns for the investments supporting
these liabilities and ranged from 6.0% to 6.4% in 2008 and 6.0% to 6.2% in 2007. The discount rates for
retrospectively-rated contracts are set at contractually specified levels. Our estimates of unpaid claims are subject
to change due to changes in the underlying experience of the insurance contracts, changes in investment yields or
other factors, and these changes are recorded in current and future benefits in our statements of income in the period
they are determined.
Policyholders’ funds
Policyholders’ funds consist primarily of reserves for pension and annuity investment contracts in the Large Case
Pensions business and customer funds associated with group life and health contracts in the Health Care and Group
Insurance businesses. Reserves for such contracts are equal to cumulative deposits less withdrawals and charges
plus credited interest thereon, net of experience-rated adjustments. In 2008, interest rates for pension and annuity
investment contracts ranged from 3.3% to 9.7% and interest rates for group life and health contracts ranged from
.1% to 4.7%. In 2007, interest rates for pension and annuity investment contracts ranged from 3.3% to 9.6% and
interest rates for group life and health contracts ranged from 1.5% to 4.9%. Reserves for contracts subject to
experience rating reflect our rights as well as the rights of policyholders and plan participants.