Aetna 2012 Annual Report Download - page 78

Annual Report- Page 72
companies' products. For example, CMS and state departments of insurance have increased their scrutiny of the
marketing practices of brokers and agents who market Medicare products. These investigations and enforcement
actions could result in penalties and the imposition of corrective action plans and/or changes to industry practices,
which could adversely affect our ability to market our products.
We face a wide range of risks, and our success depends on our ability to identify, prioritize and appropriately
manage our enterprise risk exposures.
As a large company operating in a complex industry in multiple countries, we encounter a variety of risks. The
risks we face include, among other matters, the range of industry, competitive, regulatory, financial, operational or
external risks identified in this Risk Factors discussion. We continue to devote resources to further develop and
integrate our enterprise-wide risk management processes. Failure to identify, prioritize and appropriately manage or
mitigate these risks, including risk concentrations across different industries, segments and geographies, can
adversely affect our operating results, our ability to retain or grow business, or, in the event of extreme
circumstances, our financial condition or business operations.
Epidemics, pandemics, terrorist attacks or other man-made disasters, natural disasters or other extreme
events or the continued threat of these extreme events could materially increase health care utilization,
pharmacy costs and/or life and disability claims and impact our business continuity; and we cannot predict
with certainty whether any such events will occur.
Extreme events, including terrorism, can affect the U.S. economy in general, our industry and us specifically. Such
events could adversely affect our business, cash flows, and operating results, and, in the event of extreme
circumstances, our financial condition or viability. Other than obtaining insurance coverage for our facilities and
limited reinsurance of our Health Care and/or Group Insurance liabilities, there are few, if any, commercial options
through which to transfer the exposure from terrorism or other extreme events away from us. In particular, in the
event of nuclear, biological or other terrorist attacks or other man-made disasters, natural disasters, epidemics or
other extreme events, we could face significant health care (including behavioral health), life insurance and
disability costs which would also be affected by the government's actions and the responsiveness of public health
agencies and other insurers. In addition, our life insurance members and our employees and those of our vendors
are concentrated in certain large, metropolitan areas which may be exposed to these events. Our business could also
be adversely affected if we do not maintain adequate procedures to ensure disaster recovery and business continuity
during and after such events.
We hold reserves for expected claims, which are estimated, and these estimates involve an extensive degree of
judgment; if actual claims exceed reserve estimates, our operating results could be materially adversely
affected.
Our reported health care costs payable for any particular period reflect our estimates of the ultimate cost of claims
that have been incurred by our members but not yet reported to us and claims that have been reported to us but not
yet paid. We also must estimate the amount of rebates payable under Health Care Reform's minimum MLR rules.
We estimate health care costs payable periodically, and any resulting adjustments are reflected in current-period
operating results within health care costs. Our estimates of health care costs payable are based on a number of
factors, including those derived from historical claim experience. A large portion of health care claims are not
submitted to us until after the end of the quarter in which services are rendered by providers to our members. As a
result, an extensive degree of judgment is used in this estimation process, considerable variability is inherent in
such estimates, and the adequacy of the estimate is highly sensitive to changes in medical claims submission and
processing patterns and/or procedures, changes in membership and product mix, changes in utilization of medical
and/or other covered services, changes in medical cost trends and the introduction of new benefits and products. A
worsening (or improvement) of medical cost trend or changes in claim payment patterns from those that were
assumed in estimating health care costs payable at December 31, 2012 would cause these estimates to change in the
near term, and such change could be material. Furthermore, if we are not able to accurately estimate the cost of
incurred but not yet reported claims or reported claims that have not been paid, our ability to take timely corrective
actions may be limited, which would further exacerbate the extent of any negative impact on our operating results.
These risks are particularly acute during and following periods when utilization of medical and/or other covered
services and/or medical cost trends are below recent historical levels such as we have experienced during 2010,