Aetna 2012 Annual Report Download - page 31

Annual Report- Page 25
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, resolution and mortality rates. 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 waiver of premiums and long-term disability reserves at December 31, 2012 were consistent with the rates used
at December 31, 2011 and 2010. 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 one-half percentage point from year to
year. A one-half percentage point 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 $38 million pretax for
2012.
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
recovery rates are lower (higher) than our estimates or the actual mortality rates are higher (lower) than our
estimates, our reserves will be lower (higher) than required to cover future life benefit payments. We use standard
industry tables and our historical claim experience to develop our estimated recovery and mortality rates. Claim
reserves for our disability and life products are sensitive to these assumptions. Our historical experience has been
that our recovery or mortality rates for our life and disability reserves vary by less than ten percent during the
course of a year. A ten percent less (more) favorable assumption for our recovery or mortality rates would have
increased (decreased) current and future life and disability benefit costs by approximately $61 million pretax for
2012. When establishing our reserves at December 31, 2012, we have adjusted our estimates of these rates based
on recent experience.
We estimate our reserve for claims incurred but not yet reported to us for life products largely based on completion
factors. The completion factors we use are based on our historical experience and reflect judgments and possible
adjustments based on data such as claim inventory levels, claim payment patterns, changes in business volume and
other factors. If claims are submitted or processed on a faster (slower) pace than historical periods, the actual
claims may be more (less) complete than originally estimated using our completion factors, which may result in
reserves that are higher (lower) than required to cover future life benefit payments. At December 31, 2012, we held
approximately $202 million in reserves for life claims incurred but not yet reported to us.