Aetna 2015 Annual Report Download - page 29

Annual Report- Page 23
than our actual future portfolio returns, our reserves may be higher (lower) than necessary. The discount rates we
selected for life insurance waiver of premiums and long-term disability reserves at December 31, 2015 were
consistent with the rates used at December 31, 2014 and 2013. 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 50 basis
points from year to year. A 50 basis point decrease in the discount rates selected for both our life insurance waiver
of premium and disability reserves would have increased current and future life and disability benefit costs by $39
million pretax for 2015.
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 insurance premium
waiver 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 $62 million
pretax for 2015. When establishing our reserves at December 31, 2015, we set our estimates of recovery and
mortality 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, 2015, we held
$264 million in reserves for life claims incurred but not yet reported to us.
Long-term Care
We established reserves for future policy benefits for the long-term care products we issued based on the present
value of estimated future benefit payments less the present value of estimated future net premiums. In establishing
this reserve, we evaluated assumptions about mortality, morbidity, lapse rates and the rate at which new claims
would be submitted to us. We estimated the future policy benefits reserve for long-term care products using these
assumptions and actuarial principles. For long-term care insurance contracts, we use our original assumptions
throughout the life of the policy and do not subsequently modify them unless we deem the reserves to be
inadequate. A portion of our reserves for long-term care products also reflect our estimates relating to future
payments to members currently receiving benefits. These reserves are estimated primarily using recovery and
mortality rates, as described above.
Premium Deficiency Reserves on our Health Care and Group Insurance products
We recognize a premium deficiency loss when it is probable that expected future health care costs or expected
future policy benefit 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 premium deficiency reserves for our Health Care or Group Insurance business
at December 31, 2015 or 2014.