Aetna 2011 Annual Report Download - page 79

Annual Report- Page 73
Premium Deficiency Reserves
We evaluate our insurance contracts to determine if it is probable that a loss will be incurred. We recognize a
premium deficiency loss when it is probable that expected future claims, including maintenance costs (for
example, claim processing costs), will exceed existing reserves plus anticipated future premiums and reinsurance
recoveries. Anticipated investment income is considered in the calculation of premium deficiency losses for short-
duration contracts. For purposes of determining premium deficiency losses, contracts are grouped in a manner
consistent with our method of acquiring, servicing and measuring the profitability of such contracts. We did not
have any premium deficiency reserves at December 31, 2011 or 2010.
Health Care Contract Acquisition Costs
Health care benefits products included in the Health Care segment are cancelable by either the customer or the
member monthly upon written notice. Acquisition costs related to our prepaid health care and health indemnity
contracts are generally expensed as incurred.
Revenue Recognition
Health care premiums are recognized as income in the month in which the enrollee is entitled to receive health care
services. Health care premiums are reported net of an allowance for estimated terminations and uncollectable
amounts. Additionally, beginning in 2011, premium revenue subject to the minimum MLR rebate requirements of
Health Care Reform is recorded net of the estimated minimum MLR rebates for the current calendar year. Other
premium revenue for group life, long-term care and disability products is recognized as income, net of allowances
for termination and uncollectable accounts, over the term of the coverage. Other premium revenue for Large Case
Pensions' limited payment pension and annuity contracts is recognized as revenue in the period received. Premiums
related to unexpired contractual coverage periods are reported as unearned premiums in our balance sheets.
The balance of the allowance for estimated terminations and uncollectable accounts on premiums receivable was
$73 million and $80 million at December 31, 2011 and 2010, respectively, and is reflected as a reduction of
premiums receivable in our balance sheets. The balance of the allowance for uncollectable accounts on other
receivables was $20 million and $26 million at December 31, 2011 and 2010, respectively, and is reflected as a
reduction of other receivables in our balance sheets.
Some of our contracts allow for premiums to be adjusted to reflect actual experience or the relative health status of
members. Such adjustments are reasonably estimable (based on actual experience of the customer emerging under
the contract and the terms of the underlying contract) and are recognized as the experience emerges.
Fees and other revenue consists primarily of ASC fees which are received in exchange for performing certain claim
processing and member services for health and disability members and are recognized as revenue over the period
the service is provided. Some of our contracts include guarantees with respect to certain functions, such as
customer service response time, claim processing accuracy and claim processing turnaround time, as well as certain
guarantees that a plan sponsor's claim experience will fall within a certain range. With any of these guarantees, we
are financially at risk if the conditions of the arrangements are not met, although the maximum amount at risk is
typically limited to a percentage of the fees otherwise payable to us by the customer involved. We accrue for any
such exposure when it becomes probable that an obligation has arisen under the terms of a guarantee.
In addition, fees and other revenue also include charges assessed against contract holders' funds for contract fees,
participant fees and asset charges related to pension and annuity products in the Large Case Pensions business.
Other amounts received on pension and annuity investment-type contracts are reflected as deposits and are not
recorded as revenue. Some of our Large Case Pension contract holders have the contractual right to purchase
annuities with life contingencies using the funds they maintain on deposit with us. Since these products are
considered an insurance contract, when the contract holder makes this election, we treat the accumulated investment
balance as a single premium and reflect it as both premiums and current and future benefits in our statements of
income.