Assurant 2014 Annual Report Download - page 101

ASSURANT, INC. – 2014 Form 10-K F-13
2 Summary of Signifi cant Accounting Policies
Reserves
Reserves are established in accordance with GAAP, using
generally accepted actuarial methods. Factors used in their
calculation include experience derived from historical claim
payments and actuarial assumptions. Such assumptions
and other factors include trends, the incidence of incurred
claims, the extent to which all claims have been reported,
and internal claims processing charges. The process used in
computing reserves cannot be exact, particularly for liability
coverages, since actual claim costs are dependent upon
such complex factors as infl ation, changes in doctrines of
legal liabilities and damage awards. The methods of making
such estimates and establishing the related liabilities are
periodically reviewed and updated.
Reserves do not represent an exact calculation of exposure,
but instead represent our best estimates of what we expect
the ultimate settlement and administration of a claim or group
of claims will cost based on facts and circumstances known
at the time of calculation. The adequacy of reserves may
be impacted by future trends in claims severity, frequency,
judicial theories of liability and other factors. These variables
are affected by both external and internal events, including
but not limited to: changes in the economic cycle, changes
in the social perception of the value of work, emerging
medical perceptions regarding physiological or psychological
causes of disability, emerging health issues and new methods
of treatment or accommodation, infl ation, judicial trends,
legislative changes and claims handling procedures.
Many of these items are not directly quantifi able. Reserve
estimates are refi ned as experience develops. Adjustments
to reserves, both positive and negative, are refl ected in
the consolidated statement of operations in the period in
which such estimates are updated. Because establishment of
reserves is an inherently uncertain process involving estimates
of future losses, there can be no certainty that ultimate
losses will not exceed existing claims reserves. Future loss
development could require reserves to be increased, which
could have a material adverse effect on our earnings in the
periods in which such increases are made. However, based
on information currently available, we believe our reserve
estimates are adequate.
Long Duration Contracts
The Company’s long duration contracts include preneed
life insurance policies and annuity contracts, traditional
life insurance policies no longer offered, universal life
and annuities no longer offered, policies disposed of via
reinsurance (Fortis Financial Group (“FFG”) and Long Term
Care (“LTC”) contracts), group worksite policies, group life
conversion policies and certain medical policies.
Future policy benefi ts and expense reserves for LTC, certain
life and annuity insurance policies no longer offered, a
majority of individual medical policies issued prior to 2003,
certain medical contracts issued from 2003 through 2006,
individual voluntary limited benefi t health policies issued
in 2007 and later, the traditional life insurance contracts
within FFG group worksite contracts and group life conversion
policies are equal to the present value of future benefi ts to
policyholders plus related expenses less the present value
of the future net premiums. These amounts are estimated
based on assumptions as to the expected investment yield,
infl ation, mortality, morbidity and withdrawal rates as well
as other assumptions that are based on the Company’s
experience. These assumptions refl ect anticipated trends
and include provisions for possible unfavorable deviations.
Future policy benefi ts and expense reserves for preneed
investment-type annuities, preneed life insurance policies
with discretionary death benefi t growth issued after 2008,
universal life insurance policies and investment-type annuity
contracts (no longer offered), and the variable life insurance
and investment-type annuity contracts in FFG consist of policy
account balances before applicable surrender charges and
certain deferred policy initiation fees that are being recognized
in income over the terms of the policies. Policy benefi ts
charged to expense during the period include amounts paid
in excess of policy account balances and interest credited
to policy account balances. An unearned revenue reserve
is also recorded for those preneed life insurance contracts
which represents the balance of the excess of gross premiums
over net premiums that is still recognized in future years’
income in a constant relationship to estimated gross profi ts.
Future policy benefi ts and expense reserves for preneed life
insurance contracts issued prior to 2009 are reported at the
present value of future benefi ts to policyholders and related
expenses less the present value of future net premiums.
Reserve assumptions are selected using best estimates for
expected investment yield, infl ation, mortality and withdrawal
rates. These assumptions refl ect current trends, are based
on Company experience and include provision for possible
unfavorable deviation. An unearned revenue reserve is also
recorded for these contracts which represents the balance
of the excess of gross premiums over net premiums that is
still to be recognized in future years’ income in a constant
relationship to insurance in force.
Reserves for group worksite policies also include case reserves
and incurred but not reported (“IBNR”) reserves which equal
the net present value of the expected future claims payments.
Worksite group disability reserves are discounted to the
valuation date at the valuation interest rate. The valuation
interest rate is reviewed quarterly by taking into consideration
actual and expected earned rates on our asset portfolio.
Changes in the estimated liabilities are reported as a charge
or credit to policyholder benefi ts as the estimates are revised.
Short Duration Contracts
The Company’s short duration contracts include group term
life contracts, group disability contracts, medical contracts,
dental contracts, vision contracts, property and warranty
contracts, credit life and disability contracts and extended
service contracts. For short duration contracts, claims and
benefi ts payable reserves are recorded when insured events
occur. The liability is based on the expected ultimate cost of